Every investor on earth makes bad calls sometimes. But really big losses can really drag down an overall portfolio. So spare a thought for the long term shareholders of Norwood Systems Limited (ASX:NOR); the share price is down a whopping 86% in the last three years. That would be a disturbing experience. And the ride hasn't got any smoother in recent times over the last year, with the price 29% lower in that time. The falls have accelerated recently, with the share price down 49% in the last three months. But this could be related to the weak market, which is down 22% in the same period.
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.
Norwood Systems recorded just AU$547,958 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. 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 Norwood Systems can make progress and gain better traction for the business, before it runs low on cash.
We think companies that have neither significant revenues nor profits are pretty high risk. There was already a significant chance that they would need more money for business development, and indeed they recently put themselves at the mercy of capital markets and raised equity. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). Some Norwood Systems investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Our data indicates that Norwood Systems had more in total liabilities than it had cash, when it last reported. That made it extremely high risk, in our view. But with the share price diving 48% per year, over 3 years , it's probably fair to say that some shareholders no longer believe the company will succeed or they are worried about dilution with the recent cash injection. You can see in the image below, how Norwood Systems'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. Would it bother you if insiders were selling the stock? It would bother me, that's for sure. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
The last twelve months weren't great for Norwood Systems shares, which performed worse than the market, costing holders 29%. Meanwhile, the broader market slid about 9.6%, likely weighing on the stock. However, the loss over the last year isn't as bad as the 48% per annum loss investors have suffered over the last three years. We'd need clear signs of growth in the underlying business before we could muster much enthusiasm for this one. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. For instance, we've identified 5 warning signs for Norwood Systems (2 don't sit too well with us) that you should be aware of.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on AU exchanges.
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