Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. While individual stocks can be big winners, plenty more fail to generate satisfactory returns. That downside risk was realized by Pearl Global Limited (ASX:PG1) shareholders over the last year, as the share price declined 42%. That contrasts poorly with the market return of 25%. Pearl Global may have better days ahead, of course; we've only looked at a one year period. Even worse, it's down 15% in about a month, which isn't fun at all.
We don't think Pearl Global's revenue of AU$173,226 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. It seems likely some shareholders believe that Pearl Global will significantly advance the business plan before too long.
Companies that lack both meaningful revenue and profits are usually considered high risk. 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 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 Pearl Global had minimal cash in excess of all liabilities consider its expenditure: just AU$3.7m to be specific. 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 42% in the last year . The image below shows how Pearl Global's balance sheet has changed over time; if you want to see the precise values, simply click on the image. The image below shows how Pearl Global's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? It would bother me, that's for sure. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
While Pearl Global shareholders are down 42% for the year, the market itself is up 25%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. It's great to see a nice little 2.1% rebound in the last three months. Let's just hope this isn't the widely-feared 'dead cat bounce' (which would indicate further declines to come). 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 7 warning signs for Pearl Global (4 are a bit concerning) that you should be aware of.
We will like Pearl Global 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 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.