Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. Unfortunately the Hua Medicine (Shanghai) Ltd. (HKG:2552) share price slid 11% over twelve months. That contrasts poorly with the market return of -2.1%. We wouldn't rush to judgement on Hua Medicine (Shanghai) because we don't have a long term history to look at. It's down 2.8% in the last seven days.
Hua Medicine (Shanghai) recorded just CN¥2,733,000 in revenue over the last twelve months, which isn't really enough for us to consider it to have a proven product. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? 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 Hua Medicine (Shanghai) 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 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.
Hua Medicine (Shanghai) has plenty of cash in the bank, with cash in excess of all liabilities sitting at CN¥1.2b, when it last reported (June 2019). That allows management to focus on growing the business, and not worry too much about raising capital. But with the share price diving 11% in the last year , it could be that the price was previously too hyped up. The image below shows how Hua Medicine (Shanghai)'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 Hua Medicine (Shanghai)'s balance sheet has changed over time; if you want to see the precise values, simply click on the image.
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. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I'd like that just about as much as I like to drink milk and fruit juice mixed together. You can click here to see if there are insiders selling.
A Different Perspective
We doubt Hua Medicine (Shanghai) shareholders are happy with the loss of 11% over twelve months. That falls short of the market, which lost 2.1%. 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 0.4%, suggesting an absence of enthusiasm from investors. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. You could get a better understanding of Hua Medicine (Shanghai)'s growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Hua Medicine (Shanghai) may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on HK exchanges.
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If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.