U.S. Markets closed

Easy Come, Easy Go: How Avalon Advanced Materials (TSE:AVL) Shareholders Got Unlucky And Saw 87% Of Their Cash Evaporate

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

While it may not be enough for some shareholders, we think it is good to see the Avalon Advanced Materials Inc. (TSE:AVL) share price up 30% in a single quarter. But will that heal all the wounds inflicted over 5 years of declines? Unlikely. In fact, the share price has tumbled down a mountain to land 87% lower after that period. So we don't gain too much confidence from the recent recovery. The million dollar question is whether the company can justify a long term recovery.

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 Avalon Advanced Materials

Avalon Advanced Materials didn't have any revenue in the last year, so it's fair to say it doesn't yet have a proven product (or at least not one people are paying for). This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Avalon Advanced Materials finds some valuable resources, before it runs out of money.

Companies that lack both meaningful revenue and profits are usually considered 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 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 Avalon Advanced Materials investors have already had a taste of the bitterness stocks like this can leave in the mouth.

Avalon Advanced Materials had liabilities exceeding cash by CA$4,383,105 when it last reported in May 2019, according to our data. That makes it extremely high risk, in our view. But with the share price diving 34% per year, over 5 years, it's probably fair to say that some shareholders no longer believe the company will succeed. You can see in the image below, how Avalon Advanced Materials's cash levels have changed over time (click to see the values). You can see in the image below, how Avalon Advanced Materials's cash levels have changed over time (click to see the values).

TSX:AVL Historical Debt, July 17th 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 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

Avalon Advanced Materials shareholders are down 13% for the year, but the market itself is up 0.5%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. However, the loss over the last year isn't as bad as the 34% per annum loss investors have suffered over the last half decade. We'd need to see some sustained improvements in the key metrics before we could muster much enthusiasm. If you would like to research Avalon Advanced Materials in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.

But note: Avalon Advanced 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 CA 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.