Ideally, your overall portfolio should beat the market average. But every investor is virtually certain to have both over-performing and under-performing stocks. At this point some shareholders may be questioning their investment in Fitzroy River Corporation Limited (ASX:FZR), since the last five years saw the share price fall 31%. It’s up 3.1% in the last seven days.
With just AU$358,000 worth of revenue in twelve months, we don’t think the market considers Fitzroy River to have proven its business plan. 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). For example, they may be hoping that Fitzroy River finds fossil fuels with an exploration program, before it runs out of money.
Companies that lack both meaningful revenue and profits are usually considered high risk. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt.
When it last reported its balance sheet in June 2019, Fitzroy River could boast a strong position, with cash in excess of all liabilities of AU$1.2m. That allows management to focus on growing the business, and not worry too much about raising capital. But with the share price diving 7.2% per year, over 5 years , it could be that the price was previously too hyped up. You can see in the image below, how Fitzroy River’s cash levels have changed over time (click to see the values). The image below shows how Fitzroy River’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. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
Investors in Fitzroy River had a tough year, with a total loss of 11%, against a market gain of about 27%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 7.2% over the last half decade. Generally speaking long term share price weakness can be a bad sign, though contrarian investors might want to research the stock in hope of a turnaround. It’s always interesting to track share price performance over the longer term. But to understand Fitzroy River better, we need to consider many other factors. For example, we’ve discovered 3 warning signs for Fitzroy River (of which 2 are major) which any shareholder or potential investor should be aware of.
We will like Fitzroy River 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 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.
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