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Easy Come, Easy Go: How Adamas Finance Asia (LON:ADAM) Shareholders Got Unlucky And Saw 80% Of Their Cash Evaporate

Simply Wall St

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Long term investing is the way to go, but that doesn't mean you should hold every stock forever. We really hate to see fellow investors lose their hard-earned money. Anyone who held Adamas Finance Asia Limited (LON:ADAM) for five years would be nursing their metaphorical wounds since the share price dropped 80% in that time. And it's not just long term holders hurting, because the stock is down 34% in the last year. It's down 20% in the last seven days.

Check out our latest analysis for Adamas Finance Asia

With zero revenue generated over twelve months, we don't think that Adamas Finance Asia has proved its business plan yet. You have to wonder why venture capitalists aren't funding it. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). Investors will be hoping that Adamas Finance Asia can make progress and gain better traction for the business, before it runs low on cash.

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 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). It certainly is a dangerous place to invest, as Adamas Finance Asia investors might realise.

When it last reported its balance sheet in December 2018, Adamas Finance Asia could boast a strong position, with cash in excess of all liabilities of US$64m. This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But since the share price has dropped 28% per year, over 5 years, it seems like the market might have been over-excited previously. The image below shows how Adamas Finance Asia's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

AIM:ADAM Historical Debt, June 26th 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. 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

Adamas Finance Asia shareholders are down 34% for the year, but the market itself is up 1.7%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 28% 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 businesses. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.

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 GB 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.