It's easy to match the overall market return by buying an index fund. But if you buy individual stocks, you can do both better or worse than that. That downside risk was realized by CannPal Animal Therapeutics Limited (ASX:CP1) shareholders over the last year, as the share price declined 15%. That's disappointing when you consider the market returned 20%. Because CannPal Animal Therapeutics hasn't been listed for many years, the market is still learning about how the business performs. The last month has also been disappointing, with the stock slipping a further 33%.
With just AU$297,300 worth of revenue in twelve months, we don't think the market considers CannPal Animal Therapeutics to have proven its business plan. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that CannPal Animal Therapeutics will significantly advance the business plan before too long.
Companies that lack both meaningful revenue and profits are usually considered 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).
When it last reported its balance sheet in June 2019, CannPal Animal Therapeutics had cash in excess of all liabilities of AU$3.2m. While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. We'd venture that shareholders are concerned about the need for more capital, because the share price has dropped 15% in the last year . You can click on the image below to see (in greater detail) how CannPal Animal Therapeutics's cash levels have changed over time. The image below shows how CannPal Animal Therapeutics's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
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 costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
While CannPal Animal Therapeutics shareholders are down 15% for the year, the market itself is up 20%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. The share price decline has continued throughout the most recent three months, down 12%, suggesting an absence of enthusiasm from investors. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example - CannPal Animal Therapeutics has 5 warning signs (and 2 which are a bit concerning) we think you should know about.
We will like CannPal Animal Therapeutics 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 email@example.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.