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The Arafura Resources (ASX:ARU) Share Price Is Up 107% And Shareholders Are Boasting About It

Simply Wall St

When you buy shares in a company, there is always a risk that the price drops to zero. But when you pick a company that is really flourishing, you can make more than 100%. For example, the Arafura Resources Limited (ASX:ARU) share price has soared 107% return in just a single year. Meanwhile the share price is 1.1% higher than it was a week ago. However, the stock hasn't done so well in the longer term, with the stock only up 22% in three years.

See our latest analysis for Arafura Resources

We don't think Arafura Resources's revenue of AU$127,232 is enough to establish significant demand. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that Arafura Resources will find or develop a valuable new mine before too long.

We think companies that have neither significant revenues nor profits are pretty high risk. 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Arafura Resources has already given some investors a taste of the sweet gains that high risk investing can generate, if your timing is right.

When it reported in June 2019 Arafura Resources had minimal cash in excess of all liabilities consider its expenditure: just AU$3.9m to be specific. So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. It's a testament to the popularity of the business plan that the share price gained 97% in the last year , despite the weak balance sheet. You can click on the image below to see (in greater detail) how Arafura Resources's cash levels have changed over time. The image below shows how Arafura Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:ARU Historical Debt, January 4th 2020

It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. Given that situation, many of the best investors like to check if insiders have been buying shares. It's often positive if so, assuming the buying is sustained and meaningful. Luckily we are in a position to provide you with this free chart of insider buying (and selling).

What about the Total Shareholder Return (TSR)?

Investors should note that there's a difference between Arafura Resources's total shareholder return (TSR) and its share price change, which we've covered above. The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Arafura Resources hasn't been paying dividends, but its TSR of 122% exceeds its share price return of 107%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.

A Different Perspective

It's nice to see that Arafura Resources shareholders have received a total shareholder return of 122% over the last year. That's better than the annualised return of 13% over half a decade, implying that the company is doing better recently. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. If you would like to research Arafura Resources in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.

Of course Arafura Resources may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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

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.

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. Thank you for reading.