This month, we saw the Oilex Ltd (ASX:OEX) up an impressive 33%. But will that heal all the wounds inflicted over 5 years of declines? Unlikely. In fact, the share price has tumbled down a mountain to land 90% lower after that period. While the recent increase might be a green shoot, we're certainly hesitant to rejoice. The fundamental business performance will ultimately determine if the turnaround can be sustained.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
Oilex recorded just AU$188,220 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). It seems likely some shareholders believe that Oilex will discover or develop fossil fuel before too long.
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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. It certainly is a dangerous place to invest, as Oilex investors might realise.
Our data indicates that Oilex had AU$5.6m more in total liabilities than it had cash, when it last reported in June 2019. That makes it extremely high risk, in our view. But since the share price has dived -38% per year, over 5 years , it looks like some investors think it's time to abandon ship, so to speak. You can click on the image below to see (in greater detail) how Oilex's cash levels have changed over time. The image below shows how Oilex's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? It would bother me, that's for sure. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
While the broader market gained around 25% in the last year, Oilex shareholders lost 20%. 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. Unfortunately, longer term shareholders are suffering worse, given the loss of 38% doled out over the last five years. We'd need to see some sustained improvements in the key metrics before we could muster much enthusiasm. 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. Be aware that Oilex is showing 5 warning signs in our investment analysis , and 3 of those can't be ignored...
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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