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Is Radius Gold's (CVE:RDU) 153% Share Price Increase Well Justified?

Simply Wall St

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Unless you borrow money to invest, the potential losses are limited. But when you pick a company that is really flourishing, you can make more than 100%. Take, for example Radius Gold Inc. (CVE:RDU). Its share price is already up an impressive 153% in the last twelve months. Also pleasing for shareholders was the 100% gain in the last three months. Looking back further, the stock price is 118% higher than it was three years ago.

See our latest analysis for Radius Gold

Radius Gold didn't have any revenue in the last year, so it's fair to say it doesn't yet have a proven product (or at least not one people are paying for). So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Radius Gold 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 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 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 Radius Gold investors might know.

When it last reported its balance sheet in March 2019, Radius Gold could boast a strong position, with cash in excess of all liabilities of CA$4.7m. This gives management the flexibility to drive business growth, without worrying too much about cash reserves. And with the share price up 153% in the last year, the market is focussed on that blue sky potential. You can see in the image below, how Radius Gold's cash levels have changed over time (click to see the values). The image below shows how Radius Gold's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

TSXV:RDU Historical Debt, July 19th 2019

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. 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. Luckily we are in a position to provide you with this free chart of insider buying (and selling).

A Different Perspective

It's nice to see that Radius Gold shareholders have received a total shareholder return of 153% over the last year. That gain is better than the annual TSR over five years, which is 14%. Therefore it seems like sentiment around the company has been positive lately. In the best case scenario, this may hint at some real business momentum, implying that now could be a great time to delve deeper. Before spending more time on Radius Gold it might be wise to click here to see if insiders have been buying or selling shares.

Of course Radius Gold 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 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 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. Thank you for reading.