Galilee Energy Limited (ASX:GLL) shareholders might understandably be very concerned that the share price has dropped 31% in the last quarter. But that doesn’t change the fact that the returns over the last three years have been spectacular. In fact, the share price has taken off in that time, up 600%. Arguably, the recent fall is to be expected after such a strong rise. The share price action could signify that the business itself is dramatically improved, in that time.
We love happy stories like this one. The company should be really proud of that performance!
With just AU$34,363 worth of revenue in twelve months, we don’t think the market Galilee Energy has proven its business plan. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. For example, they may be hoping that Galilee Energy finds oil or gas with an exploration program, before it runs out of money.
As a general rule, if a company doesn’t have much revenue, and it loses money, then it is a high risk investment. The 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 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). Of course, if you time it right, high risk investments like this can really pay off, as Galilee Energy investors might know.
Galilee Energy had net cash of AU$16m when it last reported (December 2018). While that’s nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. With the share price up 91% per year, over 3 years, the market is seems hopeful about the potential, despite the cash burn. The image belows shows how Galilee Energy’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. However you can take a look at whether insiders have been buying up shares. It’s often positive if so, assuming the buying is sustained and meaningful. Luckily we are in a position to provide you with this free chart of insider buying (and selling).
What about the Total Shareholder Return (TSR)?
Investors should note that there’s a difference between Galilee Energy’s total shareholder return (TSR) and its share price change, which we’ve covered above. Arguably the TSR is a more complete return calculation because it accounts for the value of dividends (as if they were reinvested), along with the hypothetical value of any discounted capital that have been offered to shareholders. We note that Galilee Energy’s TSR, at 606% is higher than its share price rise of 600%. When you consider it hasn’t been paying a dividend, this data suggests shareholders may have had the opportunity to acquire attractively priced shares in a discounted capital raising.
A Different Perspective
It’s nice to see that Galilee Energy shareholders have received a total shareholder return of 87% over the last year. Since the one-year TSR is better than the five-year TSR (the latter coming in at 29% per year), it would seem that the stock’s performance has improved in recent times. Someone with an optimistic perspective could view the recent improvement in TSR as indicating that the business itself is getting better with time. If you want to research this stock further, the data on insider buying is an obvious place to start. You can click here to see who has been buying shares – and the price they paid.
If you like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.