Providence Resources P.l.c. (ISE:PZQA) shareholders should be happy to see the share price up 24% in the last quarter. But will that repair the damage for the weary investors who have owned this stock as it declined over half a decade? Probably not. Like a ship taking on water, the share price has sunk 94% in that time. It’s true that the recent bounce could signal the company is turning over a new leaf, but we are not so sure. The important question is if the business itself justifies a higher share price in the long term.
While a drop like that is definitely a body blow, money isn’t as important as health and happiness.
Providence Resources hasn’t yet reported any revenue yet, so it’s as much a business idea as an actual business. 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. For example, they may be hoping that Providence Resources finds fossil fuels with an exploration program, before it runs out of money.
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. Some Providence Resources investors have already had a taste of the bitterness stocks like this can leave in the mouth.
Providence Resources had net debt of €181,000 when it last reported in June 2018, according to our data. That makes it extremely high risk, in our view. But with the share price diving 43% per year, over 5 years, it’s probably fair to say that some shareholders no longer believe the company will succeed. The image below shows how Providence Resources’s balance sheet has changed over time; if you want to see the precise values, simply click on the image.
Of course, the truth is that it is hard to value companies without much revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? I’d like that just about as much as I like to drink milk and fruit juice mixed together. You can click here to see if there are insiders selling.
A Different Perspective
It’s good to see that Providence Resources has rewarded shareholders with a total shareholder return of 52% in the last twelve months. There’s no doubt those recent returns are much better than the TSR loss of 43% per year over five years. This makes us a little wary, but the business might have turned around its fortunes. You could get a better understanding of Providence Resources’s growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
Of course Providence Resources 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 IE exchanges.
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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.