It's easy to match the overall market return by buying an index fund. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. Investors in Eton Pharmaceuticals, Inc. (NASDAQ:ETON) have tasted that bitter downside in the last year, as the share price dropped 11%. That contrasts poorly with the market return of 15%. Eton Pharmaceuticals hasn't been listed for long, so although we're wary of recent listings that perform poorly, it may still prove itself with time. Unfortunately the share price momentum is still quite negative, with prices down 9.8% in thirty days.
Eton Pharmaceuticals recorded just US$500,000 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. 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. Investors will be hoping that Eton Pharmaceuticals can make progress and gain better traction for the business, before it runs low on cash.
We think companies that have neither significant revenues nor profits are pretty high risk. There is usually a significant chance that they will need more money for business development, putting them at the mercy of capital markets. So the share price itself impacts the value of the shares (as it determines the cost of capital). 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 reported in June 2019 Eton Pharmaceuticals had minimal cash in excess of all liabilities consider its expenditure: just US$13m to be specific. So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 11% in the last year . You can click on the image below to see (in greater detail) how Eton Pharmaceuticals's cash levels have changed over time. You can click on the image below to see (in greater detail) how Eton Pharmaceuticals'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. You can click here to see if there are insiders selling.
A Different Perspective
Given that the market gained 15% in the last year, Eton Pharmaceuticals shareholders might be miffed that they lost 11%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. With the stock down 5.4% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Given the relatively short history of this stock, we'd remain pretty wary until we see some strong business performance. Investors who like to make money usually check up on insider purchases, such as the price paid, and total amount bought. You can find out about the insider purchases of Eton Pharmaceuticals by clicking this link.
There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.
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