We're definitely into long term investing, but some companies are simply bad investments over any time frame. We don't wish catastrophic capital loss on anyone. Imagine if you held Lion Energy Limited (ASX:LIO) for half a decade as the share price tanked 86%. And we doubt long term believers are the only worried holders, since the stock price has declined 30% over the last twelve months. The silver lining is that the stock is up 4.0% in about a week.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
With just US$410,877 worth of revenue in twelve months, we don't think the market considers Lion Energy to have proven its business plan. You have to wonder why venture capitalists aren't funding it. 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, they may be hoping that Lion Energy finds fossil fuels with an exploration program, before it runs out of money.
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. Lion Energy has already given some investors a taste of the bitter losses that high risk investing can cause.
Lion Energy had cash in excess of all liabilities of just US$396k when it last reported (June 2019). So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. With that in mind, you can understand why the share price dropped 32% per year, over 5 years . You can see in the image below, how Lion Energy's cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how Lion Energy's cash levels have changed over time.
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.
A Different Perspective
While the broader market gained around 14% in the last year, Lion Energy shareholders lost 30%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, longer term shareholders are suffering worse, given the loss of 32% doled out over the last five years. We'd need to see some sustained improvements in the key metrics before we could muster much enthusiasm. Before spending more time on Lion Energy it might be wise to click here to see if insiders have been buying or selling shares.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.