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Falcon Oil & Gas (CVE:FO) Shareholders Have Enjoyed An Impressive 122% Share Price Gain

Simply Wall St

The worst result, after buying shares in a company (assuming no leverage), would be if you lose all the money you put in. But when you pick a company that is really flourishing, you can make more than 100%. For example, the Falcon Oil & Gas Ltd. (CVE:FO) share price has soared 122% in the last three years. Most would be happy with that. Then again, the 9.1% share price decline hasn't been so fun for shareholders.

See our latest analysis for Falcon Oil & Gas

With just US$16,000 worth of revenue in twelve months, we don't think the market considers Falcon Oil & Gas to have proven its business plan. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, they may be hoping that Falcon Oil & Gas finds fossil fuels with an exploration program, before it runs out of money.

We think companies that have neither significant revenues nor profits are pretty high risk. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). 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 Falcon Oil & Gas investors have already had a taste of the sweet taste stocks like this can leave in the mouth, as they gain popularity and attract speculative capital.

When it reported in September 2019 Falcon Oil & Gas had minimal cash in excess of all liabilities consider its expenditure: just US$2.1m to be specific. So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. Given how low on cash the it got, investors must really like its potential for the share price to be up 92% per year, over 3 years . You can click on the image below to see (in greater detail) how Falcon Oil & Gas's cash levels have changed over time. The image below shows how Falcon Oil & Gas's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

TSXV:FO Historical Debt, December 31st 2019

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. You can click here to see if there are insiders buying.

A Different Perspective

While the broader market gained around 19% in the last year, Falcon Oil & Gas shareholders lost 9.1%. 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. On the bright side, long term shareholders have made money, with a gain of 14% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. You could get a better understanding of Falcon Oil & Gas's growth by checking out this more detailed historical graph of 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 CA 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.