Some stocks are best avoided. It hits us in the gut when we see fellow investors suffer a loss. Spare a thought for those who held RedFlow Limited (ASX:RFX) for five whole years - as the share price tanked 86%. We also note that the stock has performed poorly over the last year, with the share price down 49%. Shareholders have had an even rougher run lately, with the share price down 17% in the last 90 days.
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.
See our latest analysis for RedFlow
With just AU$800,072 worth of revenue in twelve months, we don't think the market considers RedFlow to have proven its business plan. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? 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. Investors will be hoping that RedFlow can make progress and gain better traction for the business, before it runs low on cash.
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 go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. RedFlow has already given some investors a taste of the bitter losses that high risk investing can cause.
When it reported in June 2019 RedFlow had minimal cash in excess of all liabilities consider its expenditure: just AU$7.7m to be specific. So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 33% per year, over 5 years . You can click on the image below to see (in greater detail) how RedFlow's cash levels have changed over time. The image below shows how RedFlow'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
RedFlow shareholders are down 49% for the year, but the market itself is up 24%. 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 31% 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 RedFlow better, we need to consider many other factors. For example, we've discovered 7 warning signs for RedFlow (3 are concerning!) that you should be aware of before investing here.
RedFlow is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.
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.