As an investor, mistakes are inevitable. But you want to avoid the really big losses like the plague. So consider, for a moment, the misfortune of Kairos Minerals Limited (ASX:KAI) investors who have held the stock for three years as it declined a whopping 80%. That would be a disturbing experience. And the ride hasn't got any smoother in recent times over the last year, with the price 58% lower in that time. Unhappily, the share price slid 5.9% in the last week.
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We don't think Kairos Minerals's revenue of AU$8,213 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. It seems likely some shareholders believe that Kairos Minerals will find or develop a valuable new mine before too long.
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 companies like this go on to deliver on their plan, making good money for shareholders, many end in painful losses and eventual de-listing. Kairos Minerals has already given some investors a taste of the bitter losses that high risk investing can cause.
When it reported in December 2018 Kairos Minerals had minimal net cash consider its expenditure: just AU$2.5m to be specific. So if it hasn't remedied the situation already, it will almost certainly have to raise more capital soon. With that in mind, you can understand why the share price dropped 42% per year, over 3 years. You can see in the image below, how Kairos Minerals's cash levels have changed over time (click to see the values).
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'd like that just about as much as I like to drink milk and fruit juice mixed together. It only takes a moment for you to check whether we have identified any insider sales recently.
A Different Perspective
While the broader market gained around 8.5% in the last year, Kairos Minerals shareholders lost 58%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Unfortunately, last year's performance may indicate unresolved challenges, given that it was worse than the annualised loss of 25% over the last half decade. We realise that Buffett has said investors should 'buy when there is blood on the streets', but we caution that investors should first be sure they are buying a high quality businesses. You could get a better understanding of Kairos Minerals's growth by checking out this more detailed historical graph of earnings, revenue and cash flow.
But note: Kairos Minerals may not be the best stock to buy. So take a peek at this free list of interesting companies with past earnings growth (and further growth forecast).
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.