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Easy Come, Easy Go: How Applied Graphene Materials (LON:AGM) Shareholders Got Unlucky And Saw 92% Of Their Cash Evaporate

Simply Wall St

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. Imagine if you held Applied Graphene Materials plc (LON:AGM) for half a decade as the share price tanked 92%. We also note that the stock has performed poorly over the last year, with the share price down 58%. The falls have accelerated recently, with the share price down 14% in the last three months.

We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.

View our latest analysis for Applied Graphene Materials

We don't think Applied Graphene Materials's revenue of UK£50,000 is enough to establish significant demand. 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. It seems likely some shareholders believe that Applied Graphene Materials will significantly advance the business plan 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. 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). Some Applied Graphene Materials investors have already had a taste of the bitterness stocks like this can leave in the mouth.

Applied Graphene Materials had cash in excess of all liabilities of UK£5.1m when it last reported (July 2019). That's not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. With the share price down 40% per year, over 5 years , it seems likely that the need for cash is weighing on investors' minds. You can see in the image below, how Applied Graphene Materials'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 Applied Graphene Materials's cash levels have changed over time.

AIM:AGM Historical Debt, January 14th 2020

In reality it's hard to have much certainty when valuing a business that has neither 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 19% in the last year, Applied Graphene Materials shareholders lost 58%. 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 40% 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. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - Applied Graphene Materials has 5 warning signs (and 3 which are concerning) we think you should know about.

But note: Applied Graphene Materials may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB 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.