Generally speaking long term investing is the way to go. But no-one is immune from buying too high. Zooming in on an example, the Stellar AfricaGold Inc. (CVE:SPX) share price dropped 70% in the last half decade. We certainly feel for shareholders who bought near the top. And we doubt long term believers are the only worried holders, since the stock price has declined 63% over the last twelve months. It's down 25% in the last seven days.
With zero revenue generated over twelve months, we don't think that Stellar AfricaGold has proved its business plan yet. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. 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. For example, investors may be hoping that Stellar AfricaGold finds some valuable resources, before it runs out of money.
As a general rule, if a company doesn't have much revenue, and it loses money, then it is a high risk investment. 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). It certainly is a dangerous place to invest, as Stellar AfricaGold investors might realise.
Our data indicates that Stellar AfricaGold had CA$2,242,845 more in total liabilities than it had cash, when it last reported in April 2019. That puts it in the highest risk category, according to our analysis. But with the share price diving 21% per year, over 5 years, it's probably fair to say that some shareholders no longer believe the company will succeed. The image below shows how Stellar AfricaGold'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 Stellar AfricaGold'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. 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
Investors in Stellar AfricaGold had a tough year, with a total loss of 63%, against a market gain of about 1.7%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 21% per year over five years. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
But note: Stellar AfricaGold may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA exchanges.
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.
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. Thank you for reading.