It might be of some concern to shareholders to see the Sovereign Metals Limited (ASX:SVM) share price down 12% in the last month. But that fact in itself shouldn't obscure what are quite decent returns over the last year. We say this because the stock (which is up 31%) actually surpassed the market return of (28%).
With just AU$80,251 worth of revenue in twelve months, we don't think the market considers Sovereign Metals to have proven its business plan. 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. It seems likely some shareholders believe that Sovereign Metals will find or develop a valuable new mine before too long.
We think companies that have neither significant revenues nor profits are pretty high risk. 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing.
When it reported in June 2019 Sovereign Metals had minimal cash in excess of all liabilities consider its expenditure: just AU$2.7m to be specific. 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 139% in the last year , despite the weak balance sheet. You can see in the image below, how Sovereign Metals's cash levels have changed over time (click to see the values). You can see in the image below, how Sovereign Metals's cash levels have changed over time (click to see the values).
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. However you can take a look at whether insiders have been buying up shares. It's often positive if so, assuming the buying is sustained and meaningful. You can click here to see if there are insiders buying.
A Different Perspective
We're pleased to report that Sovereign Metals shareholders have received a total shareholder return of 31% over one year. That certainly beats the loss of about 3.2% per year over the last half decade. This makes us a little wary, but the business might have turned around its fortunes. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares - and the price they paid.
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 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.
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.