Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should eMetals (ASX:EMT) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
When Might eMetals Run Out Of Money?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When eMetals last reported its balance sheet in December 2019, it had zero debt and cash worth AU$12k. In the last year, its cash burn was AU$468k. Therefore, from December 2019 it seems to us it had less than two months of cash runway. It’s extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is eMetals’s Cash Burn Changing Over Time?
In our view, eMetals doesn’t yet produce significant amounts of operating revenue, since it reported just AU$4.2k in the last twelve months. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. Given the length of the cash runway, we’d interpret the 26% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we’re a bit cautious of eMetals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can eMetals Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for eMetals to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
eMetals’s cash burn of AU$468k is about 13% of its AU$3.5m market capitalisation. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is eMetals’s Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought eMetals’s cash burn relative to its market cap was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we’d be watching like a hawk for any deterioration. Taking a deeper dive, we’ve spotted 6 warning signs for eMetals you should be aware of, and 4 of them are potentially serious.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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