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Did Changing Sentiment Drive Resource Generation's (ASX:RES) Share Price Down By 42%?

Simply Wall St

In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But in any portfolio, there are likely to be some stocks that fall short of that benchmark. We regret to report that long term Resource Generation Limited (ASX:RES) shareholders have had that experience, with the share price dropping 42% in three years, versus a market return of about 36%. Even worse, it's down 21% in about a month, which isn't fun at all. This could be related to the recent financial results - you can catch up on the most recent data by reading our company report.

See our latest analysis for Resource Generation

Resource Generation recorded just AU$80,000 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? 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. It seems likely some shareholders believe that Resource Generation will discover or develop fossil fuel before too long.

We think companies that have neither significant revenues nor profits are pretty high risk. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt.

Resource Generation had liabilities exceeding cash by AU$94m when it last reported in June 2019, according to our data. That puts it in the highest risk category, according to our analysis. But with the share price diving 17% per year, over 3 years , it's probably fair to say that some shareholders no longer believe the company will succeed. The image below shows how Resource Generation'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 Resource Generation's cash levels have changed over time (click to see the values).

ASX:RES Historical Debt, October 14th 2019

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. What if insiders are ditching the stock hand over fist? 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

Resource Generation provided a TSR of 16% over the year. That's fairly close to the broader market return. The silver lining is that the share price is up in the short term, which flies in the face of the annualised loss of 7.5% over the last five years. We're pretty skeptical of turnaround stories, but it's good to see the recent share price recovery. Shareholders might want to examine this detailed historical graph of past earnings, revenue and cash flow.

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.