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This week we saw the Focus Graphite Inc. (CVE:FMS) share price climb by 20%. But spare a thought for the long term holders, who have held the stock as it bled value over the last five years. Like a ship taking on water, the share price has sunk 94% in that time. So we don't gain too much confidence from the recent recovery. The fundamental business performance will ultimately determine if the turnaround can be sustained.
We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.
With zero revenue generated over twelve months, we don't think that Focus Graphite has proved its business plan yet. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. It seems likely some shareholders believe that Focus Graphite will find or develop a valuable new mine 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. 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 do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized). It certainly is a dangerous place to invest, as Focus Graphite investors might realise.
Our data indicates that Focus Graphite had CA$5,130,813 more in total liabilities than it had cash, when it last reported in March 2019. That puts it in the highest risk category, according to our analysis. But since the share price has dived -44% 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 Focus Graphite's cash levels have changed over time.
In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. Given that situation, would you be concerned if it turned out insiders were relentlessly selling 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
Investors in Focus Graphite had a tough year, with a total loss of 25%, against a market gain of about 1.4%. Even the share prices of good stocks drop sometimes, but we want to see improvements in the fundamental metrics of a business, before getting too interested. Unfortunately, longer term shareholders are suffering worse, given the loss of 44% doled out over the last five years. We would want clear information suggesting the company will grow, before taking the view that the share price will stabilize. If you would like to research Focus Graphite in more detail then you might want to take a look at whether insiders have been buying or selling shares in the company.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on CA 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 firstname.lastname@example.org. 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.