As every investor would know, not every swing hits the sweet spot. But really bad investments should be rare. So consider, for a moment, the misfortune of Energy Resources of Australia Ltd (ASX:ERA) investors who have held the stock for three years as it declined a whopping 99%. That would certainly shake our confidence in the decision to own the stock. And the ride hasn't got any smoother in recent times over the last year, with the price 88% lower in that time. Shareholders have had an even rougher run lately, with the share price down 89% in the last 90 days. While a drop like that is definitely a body blow, money isn't as important as health and happiness.
Given the past week has been tough on shareholders, let's investigate the fundamentals and see what we can learn.
Check out our latest analysis for Energy Resources of Australia
Because Energy Resources of Australia made a loss in the last twelve months, we think the market is probably more focussed on revenue and revenue growth, at least for now. When a company doesn't make profits, we'd generally hope to see good revenue growth. As you can imagine, fast revenue growth, when maintained, often leads to fast profit growth.
Over the last three years, Energy Resources of Australia's revenue dropped 65% per year. That's definitely a weaker result than most pre-profit companies report. The swift share price decline at an annual compound rate of 26%, reflects this weak fundamental performance. We prefer leave it to clowns to try to catch falling knives, like this stock. There is a good reason that investors often describe buying a sharply falling stock price as 'trying to catch a falling knife'. Think about it.
You can see how earnings and revenue have changed over time in the image below (click on the chart to see the exact values).
This free interactive report on Energy Resources of Australia's balance sheet strength is a great place to start, if you want to investigate the stock further.
What About The Total Shareholder Return (TSR)?
Investors should note that there's a difference between Energy Resources of Australia's total shareholder return (TSR) and its share price change, which we've covered above. The TSR attempts to capture the value of dividends (as if they were reinvested) as well as any spin-offs or discounted capital raisings offered to shareholders. Energy Resources of Australia hasn't been paying dividends, but its TSR of -87% exceeds its share price return of -99%, implying it has either spun-off a business, or raised capital at a discount; thereby providing additional value to shareholders.
A Different Perspective
Investors in Energy Resources of Australia had a tough year, with a total loss of 56%, against a market gain of about 25%. 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. Regrettably, last year's performance caps off a bad run, with the shareholders facing a total loss of 11% per year over five years. We realise that Baron Rothschild 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 business. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example – Energy Resources of Australia has 4 warning signs (and 3 which are concerning) we think you should know about.
We will like Energy Resources of Australia better if we see some big insider buys. While we wait, check out this free list of undervalued stocks (mostly small caps) with considerable, recent, insider buying.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on Australian exchanges.
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