Every investor on earth makes bad calls sometimes. But you have a problem if you face massive losses more than once in a while. So consider, for a moment, the misfortune of Catabasis Pharmaceuticals, Inc. (NASDAQ:CATB) investors who have held the stock for three years as it declined a whopping 76%. That might cause some serious doubts about the merits of the initial decision to buy the stock, to put it mildly. The more recent news is of little comfort, with the share price down 44% in a year. Furthermore, it's down 31% in about a quarter. That's not much fun for holders. But this could be related to the weak market, which is down 15% in the same period.
Catabasis Pharmaceuticals recorded just US$250,000 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. 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, they may be hoping that Catabasis Pharmaceuticals comes up with a great new product, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty high risk. There is almost always a chance they will need to raise more capital, and their progress - and share price - will dictate how dilutive that is to current holders. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. It certainly is a dangerous place to invest, as Catabasis Pharmaceuticals investors might realise.
Catabasis Pharmaceuticals had cash in excess of all liabilities of US$30m when it last reported (December 2019). That's not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. With the share price down 37% per year, over 3 years , it seems likely that the need for cash is weighing on investors' minds. The image below shows how Catabasis Pharmaceuticals's balance sheet has changed over time; if you want to see the precise values, simply click on the image. You can click on the image below to see (in greater detail) how Catabasis Pharmaceuticals'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. What if insiders are ditching the stock hand over fist? I'd like that just about as much as I like to drink milk and fruit juice mixed together. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
The last twelve months weren't great for Catabasis Pharmaceuticals shares, which performed worse than the market, costing holders 44%. The market shed around 4.5%, no doubt weighing on the stock price. The three-year loss of 37% per year isn't as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. We would be wary of buying into a company with unsolved problems, although some investors will buy into struggling stocks if they believe the price is sufficiently attractive. It's always interesting to track share price performance over the longer term. But to understand Catabasis Pharmaceuticals better, we need to consider many other factors. Even so, be aware that Catabasis Pharmaceuticals is showing 4 warning signs in our investment analysis , and 2 of those are a bit concerning...
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 US exchanges.
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