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Imagine Owning AuStar Gold (ASX:AUL) And Trying To Stomach The 86% Share Price Drop

Simply Wall St

Long term investing works well, but it doesn't always work for each individual stock. We really hate to see fellow investors lose their hard-earned money. Anyone who held AuStar Gold Limited (ASX:AUL) for five years would be nursing their metaphorical wounds since the share price dropped 86% in that time. And it's not just long term holders hurting, because the stock is down 38% in the last year. Unfortunately the share price momentum is still quite negative, with prices down 29% in thirty days. Importantly, this could be a market reaction to the recently released financial results. You can check out the latest numbers in our company report.

While a drop like that is definitely a body blow, money isn't as important as health and happiness.

View our latest analysis for AuStar Gold

With just AU$2,247,102 worth of revenue in twelve months, we don't think the market considers AuStar Gold to have proven its business plan. 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 AuStar Gold 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 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 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). It certainly is a dangerous place to invest, as AuStar Gold investors might realise.

AuStar Gold had liabilities exceeding cash by AU$695k when it last reported in June 2019, according to our data. That makes it extremely high risk, in our view. But with the share price diving 33% per year, over 5 years , it's probably fair to say that some shareholders no longer believe the company will succeed. The image below shows how AuStar Gold's balance sheet has changed over time; if you want to see the precise values, simply click on the image. The image below shows how AuStar Gold's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:AUL Historical Debt, October 9th 2019

Of course, the truth is that it is hard to value companies without much revenue or profit. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. It only takes a moment for you to check whether we have identified any insider sales recently.

A Different Perspective

While the broader market gained around 13% in the last year, AuStar Gold shareholders lost 38%. 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 32% over the last half decade. 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. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.

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 editorial-team@simplywallst.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.