It is a pleasure to report that the Rainbow Rare Earths Limited (LON:RBW) is up 38% in the last quarter. But that doesn't change the fact that the returns over the last three years have been stomach churning. To wit, the share price sky-dived 71% in that time. So it's about time shareholders saw some gains. Only time will tell if the company can sustain the turnaround.

Check out our latest analysis for Rainbow Rare Earths

With just US$1,541,000 worth of revenue in twelve months, we don't think the market considers Rainbow Rare Earths to have proven its business plan. 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 Rainbow Rare Earths will find or develop a valuable new mine before too long.

We think companies that have neither significant revenues nor profits are pretty high risk. 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. It certainly is a dangerous place to invest, as Rainbow Rare Earths investors might realise.

Rainbow Rare Earths had liabilities exceeding cash by US$3.6m when it last reported in June 2019, according to our data. That puts it in the highest risk category, according to our analysis. But with the share price diving 34% per year, over 3 years , it's probably fair to say that some shareholders no longer believe the company will succeed. You can click on the image below to see (in greater detail) how Rainbow Rare Earths's cash levels have changed over time. You can click on the image below to see (in greater detail) how Rainbow Rare Earths'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. Would it bother you if insiders were selling the stock? It would bother me, that's for sure. It only takes a moment for you to check whether we have identified any insider sales recently.

A Different Perspective

Pleasingly, Rainbow Rare Earths's total shareholder return last year was 15%. That certainly beats the loss of about 34% per year over three years. It could well be that the business has turned around -- or else regained the confidence of investors. While it is well worth considering the different impacts that market conditions can have on the share price, there are other factors that are even more important. Case in point: We've spotted 7 warning signs for Rainbow Rare Earths you should be aware of, and 2 of them are a bit concerning.

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.

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.

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. Thank you for reading.