It is a pleasure to report that the Kazia Therapeutics Limited (ASX:KZA) is up 40% in the last quarter. But spare a thought for the long term holders, who have held the stock as it bled value over the last five years. In fact, the share price has tumbled down a mountain to land 72% lower after that period. While the recent increase might be a green shoot, we’re certainly hesitant to rejoice. The important question is if the business itself justifies a higher share price in the long term.
We don’t think Kazia Therapeutics’s revenue of AU$2,323,152 is enough to establish significant demand. This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. So it seems that the investors more focused on would could be, than paying attention to the current revenues (or lack thereof). It seems likely some shareholders believe that Kazia Therapeutics 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. 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 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 Kazia Therapeutics investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Our data indicates that Kazia Therapeutics had net debt of AU$1,819,137 when it last reported in December 2018. That puts it in the highest risk category, according to our analysis. But since the share price has dived -22% per year, over 5 years, it looks like some investors think it’s time to abandon ship, so to speak. You can click on the image below to see (in greater detail) how Kazia Therapeutics’s cash and debt levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. You can click here to see if there are insiders selling.
A Different Perspective
Kazia Therapeutics shareholders are down 34% for the year, but the market itself is up 8.0%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Regrettably, last year’s performance caps off a bad run, with the shareholders facing a total loss of 22% per year over five years. We realise that Buffett has said investors should ‘buy when there is blood on the streets’, but we caution that investors should first be sure they are buying a high quality businesses. 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.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies we expect will 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 email@example.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.