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 when you pick a company that is really flourishing, you can make more than 100%. To wit, the Paladin Energy Limited (ASX:PDN) share price has flown 114% in the last three years. Most would be happy with that. On top of that, the share price is up 45% in about a quarter.
With zero revenue generated over twelve months, we don't think that Paladin Energy has proved its business plan yet. 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 Paladin Energy will discover or develop fossil fuel 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. Of course, if you time it right, high risk investments like this can really pay off, as Paladin Energy investors might know.
Our data indicates that Paladin Energy had US$272m more in total liabilities than it had cash, when it last reported in December 2019. That makes it extremely high risk, in our view. So the fact that the stock is up 95% per year, over 3 years shows that high risks can lead to high rewards, sometimes. Investors must really like its potential. You can see in the image below, how Paladin Energy's cash levels have changed over time (click to see the values).
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. However you can take a look at whether insiders have been buying up shares. It's usually a positive if they have, as it may indicate they see value in the stock. You can click here to see if there are insiders buying.
A Different Perspective
Although it hurts that Paladin Energy returned a loss of 4.0% in the last twelve months, the broader market was actually worse, returning a loss of 12%. What is more upsetting is the 18% per annum loss investors have suffered over the last half decade. This sort of share price action isn't particularly encouraging, but at least the losses are slowing. It's always interesting to track share price performance over the longer term. But to understand Paladin Energy better, we need to consider many other factors. Even so, be aware that Paladin Energy is showing 4 warning signs in our investment analysis , and 1 of those is a bit concerning...
Of course Paladin Energy may not be the best stock to buy. So you may wish to see this free collection of growth stocks.
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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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. 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. Thank you for reading.