As the CAD $10.94M market cap Lithium Energi Exploration Inc (TSXV:TEXI) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will they need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. TEXI may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question. See our latest analysis for TEXI
What is cash burn?
Cash burn is when a loss-making company spends its equity to fund its expenses before making money from its day-to-day business. Currently, TEXI has $0.76M in cash holdings and producing negative cash flows from its day-to-day activities of -$0.65M. How fast TEXI runs down its cash supply over time is known as the cash burn rate. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Not surprisingly, it is more common to find unprofitable companies in the high-risk metals and mining industry. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will TEXI need to raise more cash?
Opex, or operational expenses, are the necessary costs TEXI must pay to keep the business running every day. These include employee salaries and other overhead. Opex (excluding one-offs) grew by 5.42% over the past year, which is relatively reasonable for a small-cap company. However, if TEXI continues to grow its opex at this rate, given how much money it currently has in the bank, it will need to raise capital again in 1.2 years. Though, if TEXI kept its opex level at $0.6M, it will still come to market within the next couple of years, but slightly later. Even though this is analysis is fairly basic, and TEXI still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the TEXI’s operation is, and when things may have to change.
What this means for you:
Are you a shareholder? In the context of your portfolio, you should always seek to diversify, especially if you have a relatively high exposure to TEXI. Hopefully, the analysis has shed some light on the risks you should bear in mind as a shareholder of TEXI, in particular, its tight cash runway moving forward. Now that we’ve accounted for opex growth, you should also look at expected revenue growth in order to gauge when the company may become breakeven.
Are you a potential investor? Loss-making companies are a risky play, especially those that are still ramping up its opex. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that if TEXI were to continue to grow its opex at its current rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next.
An experienced management team on the helm increases our confidence in the business – take a look at who sits on TEXI’s board and the CEO’s back ground and experience here. If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio..NB: Figures in this article are calculated using data from the last twelve months, which refer to the 12-month period ending on the last date of the month the financial statement is dated. This may not be consistent with full year annual report figures.