It might seem bad, but the worst that can happen when you buy a stock (without leverage) is that its share price goes to zero. But if you buy shares in a really great company, you can more than double your money. For example, the Aurinia Pharmaceuticals Inc. (TSE:AUP) share price has soared 181% in the last three years. How nice for those who held the stock! But it's down 7.9% in the last week.
We don't think Aurinia Pharmaceuticals's revenue of US$463,000 is enough to establish significant demand. 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 Aurinia Pharmaceuticals comes up with a great new product, before it runs out of money.
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 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). Aurinia Pharmaceuticals has already given some investors a taste of the sweet gains that high risk investing can generate, if your timing is right.
When it last reported its balance sheet in June 2019, Aurinia Pharmaceuticals had cash in excess of all liabilities of US$106m. That's not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. With the share price up 41% per year, over 3 years, the market is seems hopeful about the potential, despite the cash burn. The image below shows how Aurinia Pharmaceuticals's balance sheet has changed over time; if you want to see the precise values, simply click on the image. You can see in the image below, how Aurinia Pharmaceuticals's cash levels have changed over time (click to see the values).
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. However you can take a look at whether insiders have been buying up shares. It's often positive if so, assuming the buying is sustained and meaningful. You can click here to see if there are insiders buying.
A Different Perspective
It's nice to see that Aurinia Pharmaceuticals shareholders have received a total shareholder return of 5.5% over the last year. Having said that, the five-year TSR of 15% a year, is even better. Potential buyers might understandably feel they've missed the opportunity, but it's always possible business is still firing on all cylinders. It is all well and good that insiders have been buying shares, but we suggest you check here to see what price insiders were buying at.
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 CA 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.