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Did Changing Sentiment Drive Diatreme Resources's (ASX:DRX) Share Price Down A Worrying 58%?

Simply Wall St

Diatreme Resources Limited (ASX:DRX) shareholders should be happy to see the share price up 22% in the last week. But that isn't much consolation to those who have suffered through the declines of the last year. During that time the share price has sank like a stone, descending 58%. The share price recovery is not so impressive when you consider the fall. It may be that the fall was an overreaction.

See our latest analysis for Diatreme Resources

Diatreme Resources recorded just AU$18,993 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Diatreme Resources will find or develop a valuable new mine before too long.

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 do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). Diatreme Resources has already given some investors a taste of the bitter losses that high risk investing can cause.

Diatreme Resources had liabilities exceeding cash by AU$1.3m when it last reported in June 2019, according to our data. That makes it extremely high risk, in our view. But since the share price has dived -58% in the last year , it looks like some investors think it's time to abandon ship, so to speak. The image below shows how Diatreme Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image. You can see in the image below, how Diatreme Resources's cash levels have changed over time (click to see the values).

ASX:DRX Historical Debt, October 10th 2019

Of course, the truth is that it is hard to value companies without much revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.

A Different Perspective

Diatreme Resources shareholders are down 58% 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. Longer term investors wouldn't be so upset, since they would have made 1.9%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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.