For many, the main point of investing in the stock market is to achieve spectacular returns. When an investor finds a multi-bagger (a stock that goes up over 200%), it makes a big difference to their portfolio. For example, the Chiasma, Inc. (NASDAQ:CHMA) share price is up a whopping 312% in the last year, a handsome return in a single year. It's also good to see the share price up 62% over the last quarter. Looking back further, the stock price is 71% higher than it was three years ago.
With zero revenue generated over twelve months, we don't think that Chiasma has proved its business plan yet. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. Investors will be hoping that Chiasma can make progress and gain better traction for the business, before it runs low on cash.
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 go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Chiasma investors have already had a taste of the sweet taste stocks like this can leave in the mouth, as they gain popularity and attract speculative capital
Chiasma had net cash of just US$13m when it last reported (December 2018). So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. It's a testament to the popularity of the business plan that the share price gained 312% in the last year, despite the weak balance sheet. You can click on the image below to see (in greater detail) how Chiasma's cash and debt levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. One thing you can do is check if company insiders are buying shares. If they are buying a significant amount of shares, that's certainly a good thing. You can click here to see if there are insiders buying.
A Different Perspective
It's nice to see that Chiasma shareholders have gained 312% (in total) over the last year. That's better than the annualized TSR of 20% over the last three years. The improving returns to shareholders suggests the stock is becoming more popular with time. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.
Of course Chiasma 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 US exchanges.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.