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Catabasis Pharmaceuticals, Inc. (NASDAQ:CATB) shareholders should be happy to see the share price up 27% in the last month. But that doesn’t change the fact that the returns over the last three years have been stomach churning. In that time the share price has melted like a snowball in the desert, down 78%. So we’re relieved for long term holders to see a bit of uplift. The thing to think about is whether the business has really turned around.
Catabasis Pharmaceuticals recorded just US$250,000 in revenue over the last twelve months, which isn’t really enough for us to consider it to have a proven product. 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 Catabasis Pharmaceuticals comes up with a great new product, before it runs out of money.
Companies that lack both meaningful revenue and profits are usually considered high risk. There 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 such companies go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Some Catabasis 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 March 2019, Catabasis Pharmaceuticals had cash in excess of all liabilities of US$47m. 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 40% per year, over 3 years, it seems likely that the need for cash is weighing on investors’ minds. You can click on the image below to see (in greater detail) how Catabasis Pharmaceuticals’s cash levels have changed over time.
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. Given that situation, would you be concerned if it turned out insiders were relentlessly selling stock? It would bother me, that’s for sure. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
Over the last year, Catabasis Pharmaceuticals shareholders took a loss of 7.6%. In contrast the market gained about 6.4%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, the longer term story isn’t pretty, with investment losses running at 40% per year over three years. We’d need clear signs of growth in the underlying business before we could muster much enthusiasm for this one. You might want to assess this data-rich visualization of its earnings, revenue and cash flow.
If you are like me, then you will not want to miss this free list of growing companies that insiders are buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US 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.