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Long term investing works well, but it doesn’t always work for each individual stock. It hits us in the gut when we see fellow investors suffer a loss. Anyone who held Frontier Resources Limited (ASX:FNT) for five years would be nursing their metaphorical wounds since the share price dropped 97% in that time. And some of the more recent buyers are probably worried, too, with the stock falling 46% in the last year. Unhappily, the share price slid 22% in the last week.
We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don’t have to lose the lesson.
Frontier Resources recorded just AU$136,448 in revenue over the last twelve months, which isn’t really enough for us to consider it to have a proven product. You have to wonder why venture capitalists aren’t funding it. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Frontier Resources will find or develop a valuable new mine before too long.
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 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 Frontier Resources investors have already had a taste of the bitterness stocks like this can leave in the mouth.
When it last reported its balance sheet in December 2018, Frontier Resources could boast a strong position, with cash in excess of all liabilities of AU$5.3m. This gives management the flexibility to drive business growth, without worrying too much about cash reserves. But with the share price diving 50% per year, over 5 years, it could be that the price was previously too hyped up. The image below shows how Frontier Resources’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. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
While the broader market gained around 11% in the last year, Frontier Resources shareholders lost 46%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, longer term shareholders are suffering worse, given the loss of 48% doled out over the last five years. We’d need to see some sustained improvements in the key metrics before we could muster much enthusiasm. You could get a better understanding of Frontier Resources’s growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
If you are like me, then you will 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 AU 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 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.