Penny shares are a beautiful prospect for traders on the lookout for excessive returns at an affordable price. However additionally they include appreciable dangers, together with low liquidity and even potential scams. 

Right here, I’m taking a look at methods to try to separate the winners from the duds utilizing the favored UK-based mining firm Helium One (LSE: HE1) for example.

Test the financials

Small companies are normally unprofitable for the primary few years. That’s not essentially a foul factor, as long as they exhibit indicators of development.

Potential traders ought to examine the stability sheet to see the place they’re headed. Hopefully they’ll be capable of see:

• Rising revenues: a constant upward development in gross sales is a constructive signal
• Robust money circulate: an organization burning via money too shortly might battle to outlive
• Manageable debt ranges: extreme debt is usually a main purple flag

Helium One’s not worthwhile but however not too long ago acquired a mining license provide for its Rukwa undertaking in Tanzania. It is a big growth for the corporate and, if authorised, might assist drive vital income down the road.

Look at the enterprise mannequin

Companies with robust demand, a aggressive edge and strong long-term prospects usually tend to succeed.

Helium’s a uncommon gasoline that’s in excessive demand and may’t be artificially synthesised. Ought to Helium One’s mining efforts repay, it might get pleasure from excessive demand for years to come back. 

Assess administration high quality

Analysis the administration group’s background. Bigger firms are stored in examine by their board members however smaller firms might be unpredictable. That is essential when assessing their prospects.

In February 2023, Helium One’s CEO stepped down unexpectedly, which isn’t a promising signal. Nonetheless, he was shortly changed with Lorna Blaisse, the corporate’s lead geologist with 19 years’ expertise in exploration tasks throughout Africa.

Search for market potential

A penny inventory working in a rising trade has a greater likelihood of gaining traction. Sectors equivalent to know-how, biotech and renewable power typically provide promising alternatives.

Helium’s distinctive traits make it essential in medical imaging, scientific research, area exploration and leak detection.

Nonetheless, there’s a threat that various gases like argon might exchange a few of its makes use of. So whereas it’s a rising trade, long-term demand isn’t assured.

Be careful for purple flags

Not all penny shares are well worth the threat. Keep away from firms with frequent share dilution, overly promotional ways and low buying and selling volumes.

If an organization continuously points new shares, current traders might endure. Keep away from firms that depend on hype moderately than substance. If liquidity‘s low, it may be troublesome to purchase or promote shares at a good price.

It is a key threat at Helium One, because it’s repeatedly diluted shareholders to lift capital. It now has nearly 6bn shares in circulation from the unique 497m — a 12-fold enhance.

There’s a threat of additional shareholder dilution if extra cash is required.

Assess institutional curiosity

If skilled traders or main establishments are backing a penny inventory, that’s normally a constructive signal. Their due diligence can assist validate the corporate’s potential.

In response to stories, over 50% of Helium One shares are held by institutional traders equivalent to abrdn, Barclays and Oberon Investments.

From the above examples, we are able to see that whereas Helium One’s a promising penny inventory, it nonetheless faces appreciable dangers. Nonetheless, ought to its mining license in Tanzania be authorised, it’s definitely one to think about.