Did The Underlying Business Drive Magnetic Resources’s (ASX:MAU) Lovely 749% Share Price Gain?

Magnetic Resources NL (ASX:MAU) shareholders might be concerned after seeing the share price drop 12% in the last quarter. But that doesn’t displace its brilliant performance over three years. The longer term view reveals that the share price is up 749% in that period. So the recent fall doesn’t do much to dampen our respect for the business. The only way to form a view of whether the current price is justified is to consider the merits of the business itself.

Anyone who held for that rewarding ride would probably be keen to talk about it.

Check out our latest analysis for Magnetic Resources

Magnetic Resources recorded just AU$1,792 in revenue over the last twelve months, which isn’t really enough for us to consider it to have a proven product. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). For example, investors may be hoping that Magnetic Resources finds some valuable resources, before it runs out of money.

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 such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Of course, if you time it right, high risk investments like this can really pay off, as Magnetic Resources investors might know.

When it last reported its balance sheet in June 2019, Magnetic Resources had cash in excess of all liabilities of AU$4.5m. That’s not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. With the share price up 33% per year, over 3 years , the market is seems hopeful about the potential, despite the cash burn. The image below shows how Magnetic Resources’s balance sheet has changed over time; if you want to see the precise values, simply click on the image. You can see in the image below, how Magnetic Resources’s cash levels have changed over time (click to see the values).

ASX:MAU Historical Debt, January 10th 2020
ASX:MAU Historical Debt, January 10th 2020

In reality it’s hard to have much certainty when valuing a business that has neither revenue or profit. However you can take a look at whether insiders have been buying up 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

We’re pleased to report that Magnetic Resources shareholders have received a total shareholder return of 131% over one year. That’s better than the annualised return of 41% over half a decade, implying that the company is doing better recently. Given the share price momentum remains strong, it might be worth taking a closer look at the stock, lest you miss an opportunity. It’s always interesting to track share price performance over the longer term. But to understand Magnetic Resources better, we need to consider many other factors. For example, we’ve discovered 5 warning signs for Magnetic Resources (of which 2 are major) which any shareholder or potential investor should be aware of.

If you would prefer to check out another company — one with potentially superior financials — then do not miss this free list of companies that have proven they can 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.

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.

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.