As every investor would know, not every swing hits the sweet spot. But you want to avoid the really big losses like the plague. So consider, for a moment, the misfortune of RingCentral, Inc. (NYSE:RNG) investors who have held the stock for three years as it declined a whopping 90%. That might cause some serious doubts about the merits of the initial decision to buy the stock, to put it mildly. And the share price decline continued over the last week, dropping some 5.7%. We really hope anyone holding through that price crash has a diversified portfolio. Even when you lose money, you don't have to lose the lesson.
With the stock having lost 5.7% in the past week, it's worth taking a look at business performance and seeing if there's any red flags.
RingCentral isn't currently profitable, so most analysts would look to revenue growth to get an idea of how fast the underlying business is growing. Generally speaking, companies without profits are expected to grow revenue every year, and at a good clip. That's because fast revenue growth can be easily extrapolated to forecast profits, often of considerable size.
In the last three years, RingCentral saw its revenue grow by 20% per year, compound. That's well above most other pre-profit companies. So why has the share priced crashed 24% per year, in the same time? The share price makes us wonder if there is an issue with profitability. Ultimately, revenue growth doesn't amount to much if the business can't scale well. Unless the balance sheet is strong, the company might have to raise capital.
You can see below how earnings and revenue have changed over time (discover the exact values by clicking on the image).
RingCentral is a well known stock, with plenty of analyst coverage, suggesting some visibility into future growth. You can see what analysts are predicting for RingCentral in this interactive graph of future profit estimates.
A Different Perspective
RingCentral shareholders are up 10% for the year. Unfortunately this falls short of the market return. But at least that's still a gain! Over five years the TSR has been a reduction of 11% per year, over five years. So this might be a sign the business has turned its fortunes around. 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. Case in point: We've spotted 1 warning sign for RingCentral you should be aware of.
If you would prefer to check out another company -- one with potentially superior financials -- then do not miss this free list of companies that have proven they can grow earnings.
Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on American exchanges.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.