Some stocks are best avoided. We really hate to see fellow investors lose their hard-earned money. For example, we sympathize with anyone who was caught holding Lotus Resources Limited (ASX:LOT) during the five years that saw its share price drop a whopping 96%. The last week also saw the share price slip down another 14%.
We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.
We don't think Lotus Resources's revenue of AU$37,440 is enough to establish significant demand. 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). It seems likely some shareholders believe that Lotus Resources will find or develop a valuable new mine before too long.
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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Some Lotus Resources investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Our data indicates that Lotus Resources had AU$314k more in total liabilities than it had cash, when it last reported in June 2019. That makes it extremely high risk, in our view. But with the share price diving 47% per year, over 5 years , it's probably fair to say that some shareholders no longer believe the company will succeed. The image below shows how Lotus Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image. The image below shows how Lotus Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
Of course, the truth is that it is hard to value companies without much revenue or profit. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
What about the Total Shareholder Return (TSR)?
Investors should note that there's a difference between Lotus Resources's total shareholder return (TSR) and its share price change, which we've covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. We note that Lotus Resources's TSR, at -93% is higher than its share price return of -96%. When you consider it hasn't been paying a dividend, this data suggests shareholders have benefitted from a spin-off, or had the opportunity to acquire attractively priced shares in a discounted capital raising.
A Different Perspective
We're pleased to report that Lotus Resources shareholders have received a total shareholder return of 25% over one year. There's no doubt those recent returns are much better than the TSR loss of 42% per year over five years. The long term loss makes us cautious, but the short term TSR gain certainly hints at a brighter future. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
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 email@example.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.