Passive investing in index funds can generate returns that roughly match the overall market. But if you pick the right individual stocks, you could make more than that. To wit, the Echo Resources Limited (ASX:EAR) share price is 16% higher than it was a year ago, much better than the market return of around 1.2% (not including dividends) in the same period. That's a solid performance by our standards! Echo Resources hasn't been listed for long, so it's still not clear if it is a long term winner.
Echo Resources recorded just AU$42,477 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Echo 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 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).
Echo Resources had cash in excess of all liabilities of just AU$1.3m when it last reported (December 2018). So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. It's a testament to the popularity of the business plan that the share price gained 16% in the last year, despite the weak balance sheet. You can click on the image below to see (in greater detail) how Echo Resources's cash levels have changed over time. You can click on the image below to see (in greater detail) how Echo Resources's cash levels have changed over time.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. However you can take a look at whether insiders have been buying up shares. It's often positive if so, assuming the buying is sustained and meaningful. Luckily we are in a position to provide you with this free chart of insider buying (and selling).
A Different Perspective
Echo Resources shareholders should be happy with the total gain of 16% over the last twelve months. And the share price momentum remains respectable, with a gain of 54% in the last three months. This suggests the company is continuing to win over new investors. If you would like to research Echo Resources in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
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.