Investing in stocks comes with the risk that the share price will fall. Anyone who held Immuron Limited (ASX:IMC) over the last year knows what a loser feels like. The share price has slid 67% in that time. Notably, shareholders had a tough run over the longer term, too, with a drop of 54% in the last three years. Furthermore, it's down 36% in about a quarter. That's not much fun for holders.
Immuron recorded just AU$1,902,004 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. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, they may be hoping that Immuron comes up with a great new product, before it runs out of money.
We think companies that have neither significant revenues nor profits are pretty high risk. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. 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 Immuron investors might realise.
Immuron has plenty of cash in the bank, with cash in excess of all liabilities sitting at AU$3.7m, when it last reported (December 2018). That allows management to focus on growing the business, and not worry too much about raising capital. But since the share price has dropped 67% in the last year, it seems like the market might have been over-excited previously. You can click on the image below to see (in greater detail) how Immuron's cash levels have changed over time. You can click on the image below to see (in greater detail) how Immuron's cash levels have changed over time.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Would it bother you if insiders were selling the 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
Immuron shareholders are down 67% for the year, but the market itself is up 7.9%. 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, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 14% 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. Before spending more time on Immuron it might be wise to click here to see if insiders have been buying or selling shares.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.