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Imagine Owning Key Petroleum (ASX:KEY) While The Price Tanked 60%

Simply Wall St

Over the last month the Key Petroleum Limited (ASX:KEY) has been much stronger than before, rebounding by 33%. But that doesn't change the fact that the returns over the last half decade have been disappointing. Indeed, the share price is down 60% in the period. So is the recent increase sufficient to restore confidence in the stock? Not yet. Of course, this could be the start of a turnaround.

View our latest analysis for Key Petroleum

We don't think Key Petroleum's revenue of AU$460,597 is enough to establish significant demand. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? 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. For example, they may be hoping that Key Petroleum finds fossil fuels with an exploration program, before it runs out of money.

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 such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Key Petroleum has already given some investors a taste of the bitter losses that high risk investing can cause.

Our data indicates that Key Petroleum had AU$463k more in total liabilities than it had cash, when it last reported in December 2019. That makes it extremely high risk, in our view. But since the share price has dived -17% 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 Key Petroleum's cash levels have changed over time (click to see the values).

ASX:KEY Historical Debt May 10th 2020

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 would feel more nervous about the company if that were so. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

A Different Perspective

Key Petroleum shareholders are down 11% over twelve months, which isn't far from the market return of -11%. Worse still, the company has lost shareholders 17% per year over five years. It could well be that the business has begun to stabilize, although we'd be hesitant to buy without clear information suggesting the company will grow. 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. For instance, we've identified 6 warning signs for Key Petroleum (3 are concerning) that you should be aware of.

We will like Key Petroleum better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.

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.

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. Thank you for reading.