Algernon Pharmaceuticals Inc. (CNSX:AGN) shareholders will doubtless be very grateful to see the share price up 70% in the last quarter. But the last three years have seen a terrible decline. The share price has sunk like a leaky ship, down 71% in that time. So it sure is nice to see a big of an improvement. The thing to think about is whether the business has really turned around.
Algernon Pharmaceuticals didn’t have any revenue in the last year, so it’s fair to say it doesn’t yet have a proven product (or at least not one people are paying for). This state of affairs suggests that venture capitalists won’t provide funds on attractive terms. 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 Algernon Pharmaceuticals will significantly advance the business plan 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. You should be aware that there is always a chance that this sort of company will need to issue more shares to raise money to continue pursuing its business plan. While some such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Algernon Pharmaceuticals investors have already had a taste of the bitterness stocks like this can leave in the mouth.
When it last reported its balance sheet in November 2018, Algernon Pharmaceuticals had net cash of CA$1.1m. That’s not too bad but management may have to think about raising capital or taking on debt, unless the company is close to breaking even. We’d venture that shareholders are concerned about the need for more capital, because the share price has dropped 34% per year, over 3 years. You can see in the image below, how Algernon Pharmaceuticals’s cash and debt levels have changed over time (click to see the values).
In reality it’s hard to have much certainty when valuing a business that has neither revenue or profit. 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.
A Different Perspective
Over the last year, Algernon Pharmaceuticals shareholders took a loss of 33%. In contrast the market gained about 7.9%. Of course the long term matters more than the short term, and even great stocks will sometimes have a poor year. However, the loss over the last year isn’t as bad as the 34% per annum loss investors have suffered over the last three years. We’d need clear signs of growth in the underlying business before we could muster much enthusiasm for this one. 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 like to buy stocks alongside management, then you might just love this free list of companies. (Hint: insiders have been buying them).Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA exchanges.
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