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Did Changing Sentiment Drive Buxton Resources's (ASX:BUX) Share Price Down A Painful 73%?

Simply Wall St

As every investor would know, not every swing hits the sweet spot. But really big losses can really drag down an overall portfolio. So take a moment to sympathize with the long term shareholders of Buxton Resources Limited (ASX:BUX), who have seen the share price tank a massive 73% over a three year period. That would be a disturbing experience. And the ride hasn't got any smoother in recent times over the last year, with the price 37% lower in that time. Even worse, it's down 19% in about a month, which isn't fun at all. However, we note the price may have been impacted by the broader market, which is down 8.8% in the same time period.

Check out our latest analysis for Buxton Resources

We don't think Buxton Resources's revenue of AU$725,906 is enough to establish significant demand. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. As a result, we think it's unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. For example, investors may be hoping that Buxton Resources finds some valuable resources, before it runs out of money.

Companies that lack both meaningful revenue and profits are usually considered high risk. There is almost always a chance they will need to raise more capital, and their progress - and share price - will dictate how dilutive that is to current holders. 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. Some Buxton Resources investors have already had a taste of the bitterness stocks like this can leave in the mouth.

When it last reported its balance sheet in June 2019, Buxton Resources had cash in excess of all liabilities of AU$4.6m. While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. With the share price down 36% per year, over 3 years , it seems likely that the need for cash is weighing on investors' minds. You can click on the image below to see (in greater detail) how Buxton Resources's cash levels have changed over time. You can click on the image below to see (in greater detail) how Buxton Resources's cash levels have changed over time.

ASX:BUX Historical Debt, March 2nd 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, would you be concerned if it turned out insiders were relentlessly selling stock? I'd like that just about as much as I like to drink milk and fruit juice mixed together. It only takes a moment for you to check whether we have identified any insider sales recently.

A Different Perspective

Buxton Resources shareholders are down 37% for the year, but the market itself is up 7.3%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 8.9% over the last half decade. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality business. It's always interesting to track share price performance over the longer term. But to understand Buxton Resources better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 5 warning signs with Buxton Resources (at least 2 which are potentially serious) , and understanding them should be part of your investment process.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.

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.