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Is Zynerba Pharmaceuticals's (NASDAQ:ZYNE) 102% Share Price Increase Well Justified?

Simply Wall St

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The most you can lose on any stock (assuming you don't use leverage) is 100% of your money. But if you buy shares in a really great company, you can more than double your money. For instance the Zynerba Pharmaceuticals, Inc. (NASDAQ:ZYNE) share price is 102% higher than it was three years ago. Most would be happy with that. Also pleasing for shareholders was the 91% gain in the last three months.

View our latest analysis for Zynerba Pharmaceuticals

With just US$86,000 worth of revenue in twelve months, we don't think the market considers Zynerba Pharmaceuticals to have proven its business plan. 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 Zynerba Pharmaceuticals will significantly advance the business plan before too long.

We think companies that have neither significant revenues nor profits are pretty 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. 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 Zynerba Pharmaceuticals investors have already had a taste of the sweet taste stocks like this can leave in the mouth, as they gain popularity and attract speculative capital.

When it last reported its balance sheet in March 2019, Zynerba Pharmaceuticals had cash in excess of all liabilities of US$61m. While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. Given the share price has increased by a solid 26% per year, over 3 years, its fair to say investors remain excited about the future, despite the potential need for cash. You can see in the image below, how Zynerba Pharmaceuticals's cash levels have changed over time (click to see the values). You can see in the image below, how Zynerba Pharmaceuticals's cash levels have changed over time (click to see the values).

NasdaqGM:ZYNE Historical Debt, July 2nd 2019

Of course, the truth is that it is hard to value companies without much revenue or profit. One thing you can do is check if company insiders are buying shares. If they are buying a significant amount of shares, that's certainly a good thing. Luckily we are in a position to provide you with this free chart of insider buying (and selling).

A Different Perspective

Pleasingly, Zynerba Pharmaceuticals's total shareholder return last year was 47%. So this year's TSR was actually better than the three-year TSR (annualized) of 26%. Given the track record of solid returns over varying time frames, it might be worth putting Zynerba Pharmaceuticals on your watchlist. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares - and the price they paid.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

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.

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. Thank you for reading.