There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Energy Metals (ASX:EME) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let’s start with an examination of the business’s cash, relative to its cash burn.
How Long Is Energy Metals’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Energy Metals last reported its balance sheet in June 2019, it had zero debt and cash worth AU$18m. Looking at the last year, the company burnt through AU$1.1m. So it had a very long cash runway of many years from June 2019. Depicted below, you can see how its cash holdings have changed over time.
How Is Energy Metals’s Cash Burn Changing Over Time?
Whilst it’s great to see that Energy Metals has already begun generating revenue from operations, last year it only produced AU$820, so we don’t think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. As it happens, the company’s cash burn reduced by 9.5% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Admittedly, we’re a bit cautious of Energy Metals due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Energy Metals Raise More Cash Easily?
While Energy Metals is showing a solid reduction in its cash burn, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
Energy Metals has a market capitalisation of AU$29m and burnt through AU$1.1m last year, which is 3.7% of the company’s market value. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Energy Metals’s Cash Burn A Worry?
It may already be apparent to you that we’re relatively comfortable with the way Energy Metals is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And while we could understand if some investors were a little worried about its cash burn reduction, we don’t share that concern. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Energy Metals CEO is paid..Of course Energy Metals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.