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Some Suda Pharmaceuticals (ASX:SUD) Shareholders Have Taken A Painful 94% Share Price Drop

Some stocks are best avoided. We don't wish catastrophic capital loss on anyone. For example, we sympathize with anyone who was caught holding Suda Pharmaceuticals Ltd (ASX:SUD) during the five years that saw its share price drop a whopping 94%. And some of the more recent buyers are probably worried, too, with the stock falling 52% in the last year. The falls have accelerated recently, with the share price down 20% in the last three months.

We really feel for shareholders in this scenario. It's a good reminder of the importance of diversification, and it's worth keeping in mind there's more to life than money, anyway.

View our latest analysis for Suda Pharmaceuticals

We don't think Suda Pharmaceuticals's revenue of AU$1,250,778 is enough to establish significant demand. 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. Investors will be hoping that Suda Pharmaceuticals 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 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. It certainly is a dangerous place to invest, as Suda Pharmaceuticals investors might realise.

Suda Pharmaceuticals had cash in excess of all liabilities of just AU$2.0m 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. With that in mind, you can understand why the share price dropped 43% per year, over 5 years . You can see in the image below, how Suda Pharmaceuticals's cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how Suda Pharmaceuticals's cash levels have changed over time.

ASX:SUD Historical Debt, January 23rd 2020
ASX:SUD Historical Debt, January 23rd 2020

Of course, the truth is that it is hard to value companies without much revenue or profit. Would it bother you if insiders were selling the stock? I'd like that just about as much as I like to drink milk and fruit juice mixed together. It costs nothing but a moment of your time to see if we are picking up on any insider selling.

What about the Total Shareholder Return (TSR)?

Investors should note that there's a difference between Suda Pharmaceuticals's total shareholder return (TSR) and its share price change, which we've covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. We note that Suda Pharmaceuticals's TSR, at -93% is higher than its share price return of -94%. When you consider it hasn't been paying a dividend, this data suggests shareholders have benefitted from a spin-off, or had the opportunity to acquire attractively priced shares in a discounted capital raising.

A Different Perspective

Suda Pharmaceuticals shareholders are down 49% for the year, but the market itself is up 27%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 41% per year over five years. 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. It's always interesting to track share price performance over the longer term. But to understand Suda Pharmaceuticals better, we need to consider many other factors. Take risks, for example - Suda Pharmaceuticals has 7 warning signs (and 5 which make us uncomfortable) we think you should know about.

We will like Suda Pharmaceuticals better if we see some big insider buys. While we wait, check out this free list of growing companies with considerable, recent, insider 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 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.

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