U.S. markets open in 1 hour 35 minutes

Such Is Life: How Sunstone Metals (ASX:STM) Shareholders Saw Their Shares Drop 68%

Simply Wall St

Investing in stocks comes with the risk that the share price will fall. And there's no doubt that Sunstone Metals Limited (ASX:STM) stock has had a really bad year. To wit the share price is down 68% in that time. To make matters worse, the returns over three years have also been really disappointing (the share price is 52% lower than three years ago). Furthermore, it's down 41% in about a quarter. That's not much fun for holders.

See our latest analysis for Sunstone Metals

With just AU$1,031 worth of revenue in twelve months, we don't think the market considers Sunstone Metals to have proven its business plan. You have to wonder why venture capitalists aren't funding it. 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 Sunstone Metals finds some valuable resources, before it runs out of money.

We think companies that have neither significant revenues nor profits are pretty high risk. 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 Sunstone Metals investors might realise.

Sunstone Metals had cash in excess of all liabilities of just AU$1.2m when it last reported (June 2019). So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. That probably explains why the share price is down 68% in the last year . You can click on the image below to see (in greater detail) how Sunstone Metals's cash levels have changed over time. The image below shows how Sunstone Metals's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:STM Historical Debt, February 19th 2020

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? It would bother me, that's for sure. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

A Different Perspective

While the broader market gained around 20% in the last year, Sunstone Metals shareholders lost 68%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 17% over the last half decade. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality business. 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. Be aware that Sunstone Metals is showing 7 warning signs in our investment analysis , and 3 of those don't sit too well with us...

If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).

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 editorial-team@simplywallst.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.