It's easy to match the overall market return by buying an index fund. When you buy individual stocks, you can make higher profits, but you also face the risk of under-performance. That downside risk was realized by Erris Resources Plc (LON:ERIS) shareholders over the last year, as the share price declined 43%. That's disappointing when you consider the market returned 4.8%. We wouldn't rush to judgement on Erris Resources because we don't have a long term history to look at.
View our latest analysis for Erris Resources
Erris Resources recorded just €165,216 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. So it seems shareholders are too busy dreaming about the progress to come than dwelling on the current (lack of) revenue. For example, investors may be hoping that Erris Resources finds some valuable resources, 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 almost always a chance they will need to raise more capital, and their progress - and share price - will dictate how dilutive that is to current holders. 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.
When it reported in December 2018 Erris Resources had minimal cash in excess of all liabilities consider its expenditure: just €2.2m to be specific. So if it has not already moved to replenish reserves, we think the near-term chances of a capital raising event are pretty high. With that in mind, you can understand why the share price dropped 43% in the last year. You can see in the image below, how Erris Resources's cash levels have changed over time (click to see the values). You can click on the image below to see (in greater detail) how Erris Resources's cash levels have changed over time.
Of course, the truth is that it is hard to value companies without much revenue or profit. Would it bother you if insiders were selling the stock? I would feel more nervous about the company if that were so. It costs nothing but a moment of your time to see if we are picking up on any insider selling.
A Different Perspective
While Erris Resources shareholders are down 43% for the year, the market itself is up 4.8%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. Putting aside the last twelve months, it's good to see the share price has rebounded by 14%, in the last ninety days. This could just be a bounce because the selling was too aggressive, but fingers crossed it's the start of a new trend. You could get a better understanding of Erris Resources's growth by checking out this more detailed historical graph of earnings, revenue and cash flow.