Some stocks are best avoided. We don't wish catastrophic capital loss on anyone. Imagine if you held Ikwezi Mining Limited (ASX:IKW) for half a decade as the share price tanked 92%. And some of the more recent buyers are probably worried, too, with the stock falling 67% in the last year.
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.
With just AU$12,505 worth of revenue in twelve months, we don't think the market considers Ikwezi Mining to have proven its business plan. 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 Ikwezi Mining will discover or develop fossil fuel before too long.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. 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). Ikwezi Mining has already given some investors a taste of the bitter losses that high risk investing can cause.
Ikwezi Mining had liabilities exceeding cash by AU$3.7m when it last reported in December 2018, according to our data. That puts it in the highest risk category, according to our analysis. But since the share price has dived 1510% per year, over 5 years , it looks like some investors think it's time to abandon ship, so to speak. You can see in the image below, how Ikwezi Mining's cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how Ikwezi Mining's cash levels have changed over time.
It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. Would it bother you if insiders were selling the stock? I'd like that just about as much as I like to drink milk and fruit juice mixed together. It only takes a moment for you to check whether we have identified any insider sales recently.
What about the Total Shareholder Return (TSR)?
Investors should note that there's a difference between Ikwezi Mining's total shareholder return (TSR) and its share price change, which we've covered above. The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. We note that Ikwezi Mining's TSR, at -89% is higher than its share price return of -92%. 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
While the broader market gained around 12% in the last year, Ikwezi Mining shareholders lost 56%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 35% per year over five years. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality businesses. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).
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 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. Thank you for reading.