Every investor on earth makes bad calls sometimes. But you want to avoid the really big losses like the plague. So consider, for a moment, the misfortune of Alt Resources Limited (ASX:ARS) investors who have held the stock for three years as it declined a whopping 73%. That would certainly shake our confidence in the decision to own the stock.
We don't think Alt Resources's revenue of AU$79,517 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. For example, investors may be hoping that Alt Resources finds some valuable resources, before it runs out of money.
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 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Alt Resources has already given some investors a taste of the bitter losses that high risk investing can cause.
Alt Resources had liabilities exceeding cash by AU$4.2m when it last reported in December 2019, according to our data. That makes it extremely high risk, in our view. But with the share price diving 35% per year, over 3 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 Alt Resources's cash levels have changed over time (click to see the values). You can see in the image below, how Alt Resources's cash levels have changed over time (click to see the values).
Of course, the truth is that it is hard to value companies without much revenue or profit. 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 costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
Alt Resources shareholders are down 14% for the year, falling short of the market return. Meanwhile, the broader market slid about 1.8%, likely weighing on the stock. Unfortunately, the longer term story isn't pretty, with investment losses running at 35% per year over three years. We'd need clear signs of growth in the underlying business before we could muster much enthusiasm for this one. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We've identified 7 warning signs with Alt Resources (at least 5 which are concerning) , and understanding them should be part of your investment process.
But note: Alt Resources 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 AU exchanges.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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