Did You Manage To Avoid McGrath’s (ASX:MEA) Devastating 72% Share Price Drop?

It’s not possible to invest over long periods without making some bad investments. But really bad investments should be rare. So consider, for a moment, the misfortune of McGrath Limited (ASX:MEA) investors who have held the stock for three years as it declined a whopping 72%. That might cause some serious doubts about the merits of the initial decision to buy the stock, to put it mildly. And over the last year the share price fell 38%, so we doubt many shareholders are delighted. The good news is that the stock is up 4.2% in the last week.

Check out our latest analysis for McGrath

Given that McGrath didn’t make a profit in the last twelve months, we’ll focus on revenue growth to form a quick view of its business development. Generally speaking, companies without profits are expected to grow revenue every year, and at a good clip. That’s because it’s hard to be confident a company will be sustainable if revenue growth is negligible, and it never makes a profit.

Over the last three years, McGrath’s revenue dropped 6.4% per year. That’s not what investors generally want to see. Having said that the 35% annualized share price decline highlights the risk of investing in unprofitable companies. We’re generally averse to companies with declining revenues, but we’re not alone in that. Don’t let a share price decline ruin your calm. You make better decisions when you’re calm.

The chart below shows how revenue and earnings have changed with time, (if you click on the chart you can see the actual values).

ASX:MEA Income Statement, April 16th 2019
ASX:MEA Income Statement, April 16th 2019

It’s probably worth noting that the CEO is paid less than the median at similar sized companies. It’s always worth keeping an eye on CEO pay, but a more important question is whether the company will grow earnings throughout the years. So we recommend checking out this free report showing consensus forecasts

A Different Perspective

McGrath shareholders are down 38% for the year, but the broader market is up 12%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. The three-year loss of 33% 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 McGrath in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.

But note: McGrath may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).

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.