It is doubtless a positive to see that the Lithium Australia NL (ASX:LIT) share price has gained some 80% in the last three months. Meanwhile over the last three years the stock has dropped hard. Indeed, the share price is down a tragic 61% in the last three years. So it's good to see it climbing back up. While many would remain nervous, there could be further gains if the business can put its best foot forward.

See our latest analysis for Lithium Australia

With just AU$352,861 worth of revenue in twelve months, we don't think the market considers Lithium Australia to have proven its business plan. We can't help wondering why it's publicly listed so early in its journey. Are venture capitalists not interested? 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, investors may be hoping that Lithium Australia finds some valuable resources, before it runs out of money.

Companies that lack both meaningful revenue and profits are usually considered high risk. 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. Some Lithium Australia investors have already had a taste of the bitterness stocks like this can leave in the mouth.

When it reported in June 2019 Lithium Australia had minimal cash in excess of all liabilities consider its expenditure: just AU$1.2m 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 27% per year, over 3 years . You can click on the image below to see (in greater detail) how Lithium Australia's cash levels have changed over time. The image below shows how Lithium Australia's balance sheet has changed over time; if you want to see the precise values, simply click on the image.

In reality it's hard to have much certainty when valuing a business that has neither revenue or profit. What if insiders are ditching the stock hand over fist? It would bother me, that's for sure. You can click here to see if there are insiders selling.

A Different Perspective

While the broader market gained around 20% in the last year, Lithium Australia shareholders lost 21%. However, keep in mind that even the best stocks will sometimes underperform the market over a twelve month period. On the bright side, long term shareholders have made money, with a gain of 1.2% per year over half a decade. If the fundamental data continues to indicate long term sustainable growth, the current sell-off could be an opportunity worth considering. 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. Take risks, for example - Lithium Australia has 7 warning signs (and 3 which shouldn't be ignored) we think you should know about.