Rhythm Biosciences Limited (ASX:RHY) shareholders will doubtless be very grateful to see the share price up 58% in the last month. But that doesn't change the reality of under-performance over the last twelve months. The cold reality is that the stock has dropped 41% in one year, under-performing the market.

Check out our latest analysis for Rhythm Biosciences

We don't think Rhythm Biosciences's revenue of AU$743,822 is enough to establish significant demand. 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. It seems likely some shareholders believe that Rhythm Biosciences will significantly advance the business plan before too long.

We think companies that have neither significant revenues nor profits are pretty 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 to raise equity. So the share price itself impacts the value of the shares (as it determines the cost of capital). While some such companies do very well over the long term, others become hyped up by promoters before eventually falling back down to earth, and going bankrupt (or being recapitalized).

Rhythm Biosciences had cash in excess of all liabilities of AU$3.1m when it last reported (December 2019). While that's nothing to panic about, there is some possibility the company will raise more capital, especially if profits are not imminent. We'd venture that shareholders are concerned about the need for more capital, because the share price has dropped 41% in the last year. The image below shows how Rhythm Biosciences'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. 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

We doubt Rhythm Biosciences shareholders are happy with the loss of 41% over twelve months. That falls short of the market, which lost 9.7%. That's disappointing, but it's worth keeping in mind that the market-wide selling wouldn't have helped. With the stock down 9.5% over the last three months, the market doesn't seem to believe that the company has solved all its problems. Basically, most investors should be wary of buying into a poor-performing stock, unless the business itself has clearly improved. 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 - Rhythm Biosciences has 4 warning signs (and 2 which can't be ignored) we think you should know about.

But note: Rhythm Biosciences 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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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. Thank you for reading.