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The art and science of stock market investing requires a tolerance for losing money on some of the shares you buy. But it should be a priority to avoid stomach churning catastrophes, wherever possible. It must have been painful to be a Scorpion Minerals Limited (ASX:SCN) shareholder over the last year, since the stock price plummeted 75% in that time. While some investors are willing to stomach this sort of loss, they are usually professionals who spread their bets thinly. Even if you look out three years, the returns are still disappointing, with the share price down (the share price is down 70%) in that time. Shareholders have had an even rougher run lately, with the share price down 63% in the last 90 days.
With zero revenue generated over twelve months, we don't think that Scorpion Minerals has proved its business plan yet. You have to wonder why venture capitalists aren't funding it. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Scorpion Minerals will find or develop a valuable new mine before too long.
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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Scorpion Minerals has already given some investors a taste of the bitter losses that high risk investing can cause.
Our data indicates that Scorpion Minerals had AU$2,722,791 more in total liabilities than it had cash, when it last reported in December 2018. That makes it extremely high risk, in our view. But since the share price has dived -75% in the last year, it looks like some investors think it's time to abandon ship, so to speak. The image below shows how Scorpion Minerals'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. What if insiders are ditching the stock hand over fist? 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 12% in the last year, Scorpion Minerals shareholders lost 75%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 23% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. You could get a better understanding of Scorpion Minerals's growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Scorpion Minerals 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.
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 email@example.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. Thank you for reading.