Does Respiri's (ASX:RSH) Share Price Gain of 53% Match Its Business Performance?

By buying an index fund, investors can approximate the average market return. But if you pick the right individual stocks, you could make more than that. For example, Respiri Limited (ASX:RSH) shareholders have seen the share price rise 53% over three years, well in excess of the market return (22%, not including dividends).

Check out our latest analysis for Respiri

With just AU$1,026,252 worth of revenue in twelve months, we don't think the market considers Respiri to have 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. Investors will be hoping that Respiri can make progress and gain better traction for the business, before it runs low on cash.

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 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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Some Respiri investors have already had a taste of the sweet taste stocks like this can leave in the mouth, as they gain popularity and attract speculative capital.

Respiri had liabilities exceeding cash by AU$2.3m when it last reported in June 2019, according to our data. That makes it extremely high risk, in our view. So we're surprised to see the stock up 123% per year, over 3 years , but we're happy for holders. It's clear more than a few people believe in the potential. You can see in the image below, how Respiri's cash levels have changed over time (click to see the values). The image below shows how Respiri's balance sheet has changed over time.

In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Given that situation, many of the best investors like to check if insiders have been buying 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 Respiri'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 Respiri's TSR, at 53% is higher than its share price return of 53%. When you consider it hasn't been paying a dividend, this data suggests shareholders have benefitted from a spin-off, or had the opportunity to acquire attractively priced shares in a discounted capital raising.

A Different Perspective

While the broader market gained around 23% in the last year, Respiri shareholders lost 6.3%. 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. On the bright side, long term shareholders have made money, with a gain of 3.1% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.

Of course Respiri may not be the best stock to buy. So you may wish to see this free collection of growth stocks.

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.