Did The Underlying Business Drive AVZ Minerals's (ASX:AVZ) Lovely 400% Share Price Gain?

The last three months have been tough on AVZ Minerals Limited (ASX:AVZ) shareholders, who have seen the share price decline a rather worrying 49%. But over five years returns have been remarkably great. In that time, the share price has soared some 400% higher! So it might be that some shareholders are taking profits after good performance. But the real question is whether the business fundamentals can improve over the long term.

View our latest analysis for AVZ Minerals

With just AU$169,121 worth of revenue in twelve months, we don't think the market considers AVZ Minerals to have proven its business plan. 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 AVZ Minerals 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. 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). AVZ Minerals has already given some investors a taste of the sweet gains that high risk investing can generate, if your timing is right.

AVZ Minerals had net cash of just AU$12m when it last reported (June 2018). So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. Given how low on cash the it got, investors must really like its potential for the share price to be up 38% per year, over 5 years. The image belows shows how AVZ Minerals's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

It can be extremely risky to invest in a company that doesn't even have revenue. There's no way to know its value easily. One thing you can do is check if company insiders are buying shares. It's often positive if so, assuming the buying is sustained and meaningful. You can click here to see if there are insiders buying.

What about the Total Shareholder Return (TSR)?

We've already covered AVZ Minerals's share price action, but we should also mention its total shareholder return (TSR). The TSR attempts to capture the value of dividends (as if they were reinvested) and any discounted capital raisings offered to shareholders. We note that AVZ Minerals's TSR, at 452% is higher than its share price rise of 400%. 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

Investors in AVZ Minerals had a tough year, with a total loss of 84%, against a market gain of about 9.6%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 41% per year over half a decade. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. Most investors take the time to check the data on insider transactions. You can click here to see if insiders have been buying or selling.

If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this freelist of companies that have proven they can grow earnings.

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 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. Thank you for reading.