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Imagine Owning Entek Energy (ASX:ETE) And Trying To Stomach The 92% Share Price Drop

Simply Wall St

Long term investing works well, but it doesn't always work for each individual stock. We don't wish catastrophic capital loss on anyone. Anyone who held Entek Energy Limited (ASX:ETE) for five years would be nursing their metaphorical wounds since the share price dropped 92% in that time. And we doubt long term believers are the only worried holders, since the stock price has declined 45% over the last twelve months. There was little comfort for shareholders in the last week as the price declined a further 8.3%.

We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.

View our latest analysis for Entek Energy

Entek Energy recorded just AU$54,574 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. You have to wonder why venture capitalists aren't funding it. As a result, we think it's unlikely shareholders are paying much attention to current revenue, but rather speculating on growth in the years to come. It seems likely some shareholders believe that Entek Energy will discover or develop fossil fuel before too long.

Companies that lack both meaningful revenue and profits are usually considered 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. It certainly is a dangerous place to invest, as Entek Energy investors might realise.

When it last reported its balance sheet in December 2018, Entek Energy could boast a strong position, with net cash of AU$3.9m. This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But since the share price has dropped 40% per year, over 5 years, it seems like the market might have been over-excited previously. The image below shows how Entek Energy's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:ETE Historical Debt, April 23rd 2019
ASX:ETE Historical Debt, April 23rd 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'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.

A Different Perspective

While the broader market gained around 11% in the last year, Entek Energy shareholders lost 45%. 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 40% 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. If you would like to research Entek Energy in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.

Of course Entek Energy may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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.