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Investors in American Rare Earths (ASX:ARR) have made a fantastic return of 823% over the past three years

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American Rare Earths Limited (ASX:ARR) shareholders might understandably be very concerned that the share price has dropped 46% in the last quarter. But that doesn't change the fact that the returns over the last three years have been spectacular. Over that time, we've been excited to watch the share price climb an impressive 676%. As long term investors the recent fall doesn't detract all that much from the longer term story. The share price action could signify that the business itself is dramatically improved, in that time. We love happy stories like this one. The company should be really proud of that performance!

So let's investigate and see if the longer term performance of the company has been in line with the underlying business' progress.

See our latest analysis for American Rare Earths

With just AU$2,240,354 worth of revenue in twelve months, we don't think the market considers American Rare Earths to have proven its business plan. 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 American Rare Earths will find or develop a valuable new mine before too long.

As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. 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 go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. American Rare Earths has already given some investors a taste of the sweet gains that high risk investing can generate, if your timing is right.

American Rare Earths had cash in excess of all liabilities of AU$7.2m when it last reported (December 2021). While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. Given the share price has increased by a solid 35% per year, over 3 years , it's fair to say investors remain excited about the future, despite the potential need for cash. The image below shows how American Rare Earths' balance sheet has changed over time; if you want to see the precise values, simply click on the image.

debt-equity-history-analysis
debt-equity-history-analysis

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. One thing you can do is check if company insiders are buying 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.

What about the Total Shareholder Return (TSR)?

We'd be remiss not to mention the difference between American Rare Earths' total shareholder return (TSR) and its share price return. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. American Rare Earths hasn't been paying dividends, but its TSR of 823% exceeds its share price return of 676%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.

A Different Perspective

We're pleased to report that American Rare Earths shareholders have received a total shareholder return of 162% over one year. Since the one-year TSR is better than the five-year TSR (the latter coming in at 51% per year), it would seem that the stock's performance has improved in recent times. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. 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. To that end, you should be aware of the 5 warning signs we've spotted with American Rare Earths .

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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