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Long term investing works well, but it doesn't always work for each individual stock. We don't wish catastrophic capital loss on anyone. Anyone who held Red Sky Energy Limited (ASX:ROG) for five years would be nursing their metaphorical wounds since the share price dropped 98% in that time. We also note that the stock has performed poorly over the last year, with the share price down 60%. Shareholders have had an even rougher run lately, with the share price down 50% in the last 90 days. But this could be related to the weak market, which is down 24% in the same period.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
With zero revenue generated over twelve months, we don't think that Red Sky Energy has proved its business plan yet. You have to wonder why venture capitalists aren't funding it. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, they may be hoping that Red Sky Energy finds fossil fuels with an exploration program, 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 to raise equity. 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. It certainly is a dangerous place to invest, as Red Sky Energy investors might realise.
Red Sky Energy had liabilities exceeding cash by AU$517k when it last reported in December 2019, according to our data. That puts it in the highest risk category, according to our analysis. But with the share price diving 54% per year, over 5 years , it's probably fair to say that some shareholders no longer believe the company will succeed. You can see in the image below, how Red Sky Energy'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 only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
While the broader market lost about 11% in the twelve months, Red Sky Energy shareholders did even worse, losing 60%. However, it could simply be that the share price has been impacted by broader market jitters. It might be worth keeping an eye on the fundamentals, in case there's a good opportunity. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 54% 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. It's always interesting to track share price performance over the longer term. But to understand Red Sky Energy better, we need to consider many other factors. Consider for instance, the ever-present spectre of investment risk. We've identified 7 warning signs with Red Sky Energy (at least 4 which are significant) , and understanding them should be part of your investment process.
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 AU exchanges.
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.
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.