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The art and science of stock market investing requires a tolerance for losing money on some of the shares you buy. But serious investors should think long and hard about avoiding extreme losses. So we hope that those who held Vanadium Resources Limited (ASX:VR8) during the last year don't lose the lesson, in addition to the 87% hit to the value of their shares. That'd be a striking reminder about the importance of diversification. Vanadium Resources hasn't been listed for long, so although we're wary of recent listings that perform poorly, it may still prove itself with time. The falls have accelerated recently, with the share price down 50% in the last three months. But this could be related to the weak market, which is down 29% in the same period.
While a drop like that is definitely a body blow, money isn't as important as health and happiness.
We don't think Vanadium Resources's revenue of AU$2,916 is enough to establish significant demand. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that Vanadium Resources will find or develop a valuable new mine before too long.
Companies that lack both meaningful revenue and profits are usually considered 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 to raise equity. 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. Some Vanadium Resources investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Vanadium Resources had cash in excess of all liabilities of just AU$473k when it last reported (December 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 87% in the last year. The image below shows how Vanadium Resources's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
Of course, the truth is that it is hard to value companies without much revenue or profit. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
We doubt Vanadium Resources shareholders are happy with the loss of 87% over twelve months. That falls short of the market, which lost 18%. That's disappointing, but it's worth keeping in mind that the market-wide selling wouldn't have helped. The share price decline has continued throughout the most recent three months, down 50%, suggesting an absence of enthusiasm from investors. Given the relatively short history of this stock, we'd remain pretty wary until we see some strong business performance. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Case in point: We've spotted 6 warning signs for Vanadium Resources you should be aware of, and 4 of them are a bit unpleasant.
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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