The last three months have been tough on Norwest Energy NL (ASX:NWE) shareholders, who have seen the share price decline a rather worrying 50%. But looking back over the last year, the returns have actually been rather pleasing! Looking at the full year, the company has easily bested an index fund by gaining 50%.
We don’t think Norwest Energy’s revenue of AU$364,884 is enough to establish significant demand. 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 Norwest Energy will discover or develop fossil fuel before too long.
Companies that lack both meaningful revenue and profits are usually considered high risk. There was already a significant chance that they would need more money for business development, and indeed they recently put themselves at the mercy of capital markets and raised 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.
Norwest Energy only just had cash in excess of all liabilities when it last reported. So it’s prudent that the management team has already moved to replenish reserves through the recent capital raising event. It’s a testament to the popularity of the business plan that the share price gained 125% in the last year , despite the recent dilution. You can see in the image below, how Norwest Energy’s cash levels have changed over time (click to see the values).
Of course, the truth is that it is hard to value companies without much revenue or profit. However you can take a look at whether insiders have been buying up shares. It’s usually a positive if they have, as it may indicate they see value in the stock. You can click here to see if there are insiders buying.
What about the Total Shareholder Return (TSR)?
Investors should note that there’s a difference between Norwest Energy’s total shareholder return (TSR) and its share price change, which we’ve covered above. The TSR is a return calculation that accounts for the value of cash dividends (assuming that any dividend received was reinvested) and the calculated value of any discounted capital raisings and spin-offs. Norwest Energy hasn’t been paying dividends, but its TSR of 50% exceeds its share price return of 50%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.
A Different Perspective
We’re pleased to report that Norwest Energy shareholders have received a total shareholder return of 50% over one year. That certainly beats the loss of about 8.5% per year over the last half decade. We generally put more weight on the long term performance over the short term, but the recent improvement could hint at a (positive) inflection point within the business. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Consider for instance, the ever-present spectre of investment risk. We’ve identified 5 warning signs with Norwest Energy (at least 2 which are potentially serious) , and understanding them should be part of your investment process.
We will like Norwest Energy 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.
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