Investing in stocks inevitably means buying into some companies that perform poorly. But the last three years have been particularly tough on longer term King Stone Energy Group Limited (HKG:663) shareholders. Unfortunately, they have held through a 62% decline in the share price in that time. And the ride hasn’t got any smoother in recent times over the last year, with the price 27% lower in that time. Unhappily, the share price slid 4.1% in the last week.
King Stone Energy Group recorded just HK$13,369,000 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 King Stone Energy Group finds fossil fuels with an exploration program, 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. You should be aware that the company needed to issue more shares recently so that it could raise enough 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. King Stone Energy Group has already given some investors a taste of the bitter losses that high risk investing can cause.
Our data indicates that King Stone Energy Group had more in total liabilities than it had cash, when it last reported. That made it extremely high risk, in our view. But since the share price has dived 27% per year, over 3 years , it looks like some investors think it’s time to abandon ship, so to speak, even though the cash reserves look a little better with the capital raising. You can see in the image below, how King Stone Energy Group’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. Would it bother you if insiders were selling the stock? I’d like that just about as much as I like to drink milk and fruit juice mixed together. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
King Stone Energy Group shareholders are down 27% for the year, but the market itself is up 9.5%. 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, last year’s performance may indicate unresolved challenges, given that it was worse than the annualised loss of 10% over the last half decade. …
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