The Magnum Mining and Exploration (ASX:MGU) Share Price Has Gained 138%, So Why Not Pay It Some Attention?

Magnum Mining and Exploration Limited (ASX:MGU) shareholders have seen the share price descend 29% over the month. But that scarcely detracts from the really solid long term returns generated by the company over five years. We think most investors would be happy with the 138% return, over that period. Generally speaking the long term returns will give you a better idea of business quality than short periods can. The more important question is whether the stock is too cheap or too expensive today.

View our latest analysis for Magnum Mining and Exploration

With just AU$126,235 worth of revenue in twelve months, we don't think the market considers Magnum Mining and Exploration to have proven its business plan. So it seems that the investors focused more on what could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that Magnum Mining and Exploration will find or develop a valuable new mine before too long.

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 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 Magnum Mining and Exploration 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.

Magnum Mining and Exploration had liabilities exceeding cash by AU$2.1m when it last reported in June 2019, according to our data. That makes it extremely high risk, in our view. So the fact that the stock is up 87% per year, over 5 years shows that high risks can lead to high rewards, sometimes. Investors must really like its potential. You can see in the image below, how Magnum Mining and Exploration's cash levels have changed over time (click to see the values). Look at the image below to see how Magnum Mining and Exploration's cash levels have changed over time.

Of course, the truth is that it is hard to value companies without much revenue or profit. 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. Luckily we are in a position to provide you with this free chart of insider buying (and selling).

A Different Perspective

Investors in Magnum Mining and Exploration had a tough year, with a total loss of 2.0%, against a market gain of about 23%. 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 19% 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. You could get a better understanding of Magnum Mining and Exploration's growth by checking out this more detailed historical graph of earnings, revenue and cash flow.

Of course Magnum Mining and Exploration 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.

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.