Volatility 101: Should Dimerix Shares Have Dropped 41%?

Investors can approximate the average market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. For example, the Dimerix Limited (ASX:DXB) share price is down 41% in the last year. That’s disappointing when you consider the market returned 7.6%. Longer term shareholders haven’t suffered as badly, since the stock is down a comparatively less painful 15% in three years. Unhappily, the share price slid 2.3% in the last week.

See our latest analysis for Dimerix

We don’t think Dimerix’s revenue of AU$1,098,479 is enough to establish significant demand. We can’t help wondering why it’s publicly listed so early in its journey. Are venture capitalists not interested? So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Dimerix has the funding to invent a new product before too long.

We think companies that have neither significant revenues nor profits are pretty high risk. There is almost always a chance they will need to raise more capital, and their progress – and share price – will dictate how dilutive that is to current holders. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt.

Dimerix had net cash of AU$5.1m 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 down 41% in the last year, it seems likely that the need for cash is weighing on investors’ minds. The image belows shows how Dimerix’s balance sheet has changed over time; if you want to see the precise values, simply click on the image.

ASX:DXB Historical Debt, February 28th 2019
ASX:DXB Historical Debt, February 28th 2019

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. What if insiders are ditching the stock hand over fist? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.

What about the Total Shareholder Return (TSR)?

Investors should note that there’s a difference between Dimerix’s total shareholder return (TSR) and its share price change, which we’ve covered above. The TSR attempts to capture the value of dividends (as if they were reinvested) and any discounted capital raisings offered to shareholders. Dimerix hasn’t been paying dividends, but its TSR of -41% exceeds its share price return of -41%, implying it has raised capital at a discount, which is deemed to provide value to shareholders.

A Different Perspective

The last twelve months weren’t great for Dimerix shares, which cost holders 41%, while the market was up about 7.6%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. The three-year loss of 3.7% per year isn’t as bad as the last twelve months, suggesting that the company has not been able to convince the market it has solved its problems. Although Warren Buffett famously said he likes to ‘buy when there is blood on the streets’, he also focusses on high quality stocks with solid prospects. If you would like to research Dimerix in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.

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

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.