Investing in stocks comes with the risk that the share price will fall. Unfortunately, shareholders of Nanollose Limited (ASX:NC6) have suffered share price declines over the last year. The share price is down a hefty 66% in that time. We wouldn't rush to judgement on Nanollose because we don't have a long term history to look at. The falls have accelerated recently, with the share price down 28% in the last three months.
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We don't think Nanollose's revenue of AU$117,167 is enough to establish significant demand. This state of affairs suggests that venture capitalists won't provide funds on attractive terms. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. For example, they may be hoping that Nanollose comes up with a great new treatment, before it runs out of money.
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 go on to make revenue, profits, and generate value, others get hyped up by hopeful naifs before eventually going bankrupt. Nanollose has already given some investors a taste of the bitter losses that high risk investing can cause.
Nanollose had cash in excess of all liabilities of AU$1.9m when it last reported (December 2018). 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. With the share price down 66% in the last year, it seems likely that the need for cash is weighing on investors' minds. The image below shows how Nanollose's balance sheet has changed over time; if you want to see the precise values, simply click on the image.
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. Would it bother you if insiders were selling the 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
Given that the market gained 12% in the last year, Nanollose shareholders might be miffed that they lost 66%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. The share price decline has continued throughout the most recent three months, down 28%, suggesting an absence of enthusiasm from investors. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. Before spending more time on Nanollose it might be wise to click here to see if insiders have been buying or selling shares.
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 AU 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.