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Those Who Purchased Krakatoa Resources (ASX:KTA) Shares Three Years Ago Have A 88% Loss To Show For It

While it may not be enough for some shareholders, we think it is good to see the Krakatoa Resources Limited (ASX:KTA) share price up 19% in a single quarter. But the last three years have seen a terrible decline. The share price has sunk like a leaky ship, down 88% in that time. So it sure is nice to see a big of an improvement. Only time will tell if the company can sustain the turnaround.

We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.

View our latest analysis for Krakatoa Resources

Krakatoa Resources hasn't yet reported any revenue, so it's as much a business idea as an actual business. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Krakatoa Resources finds some valuable resources, before it runs out of money.

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As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Krakatoa Resources has already given some investors a taste of the bitter losses that high risk investing can cause.

When it reported in June 2019 Krakatoa Resources had minimal cash in excess of all liabilities consider its expenditure: just AU$229k to be specific. So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. That probably explains why the share price is down 51% per year, over 3 years . You can click on the image below to see (in greater detail) how Krakatoa Resources's cash levels have changed over time. The image below shows how Krakatoa Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:KTA Historical Debt, September 30th 2019
ASX:KTA Historical Debt, September 30th 2019

Of course, the truth is that it is hard to value companies without much revenue or profit. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.

What about the Total Shareholder Return (TSR)?

Investors should note that there's a difference between Krakatoa Resources's total shareholder return (TSR) and its share price change, which we've covered above. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. We note that Krakatoa Resources's TSR, at -86% is higher than its share price return of -88%. When you consider it hasn't been paying a dividend, this data suggests shareholders have benefitted from a spin-off, or had the opportunity to acquire attractively priced shares in a discounted capital raising.

A Different Perspective

Krakatoa Resources shareholders are down 17% for the year, but the market itself is up 12%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. However, the loss over the last year isn't as bad as the 23% per annum loss investors have suffered over the last half decade. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.

But note: Krakatoa Resources may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.