Just because a business does not make any money, does not mean that the stock will go down. By way of example, Orissa Minerals Development (NSE:ORISSAMINE) has seen its share price rise 109% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given its strong share price performance, we think it’s worthwhile for Orissa Minerals Development shareholders to consider whether its cash burn is concerning. 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’.
Does Orissa Minerals Development Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2019, Orissa Minerals Development had cash of ₹2.1b and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was ₹5.6b over the trailing twelve months. That means it had a cash runway of around 5 months as of September 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. The image below shows how its cash balance has been changing over the last few years.
How Is Orissa Minerals Development’s Cash Burn Changing Over Time?
Because Orissa Minerals Development isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. With the cash burn rate up 39% in the last year, it seems that the company is ratcheting up investment in the business over time. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Admittedly, we’re a bit cautious of Orissa Minerals Development 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 Hard Would It Be For Orissa Minerals Development To Raise More Cash For Growth?
Given its cash burn trajectory, Orissa Minerals Development shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Orissa Minerals Development’s cash burn of ₹5.6b is about 54% of its ₹10b market capitalisation. That’s high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
So, Should We Worry About Orissa Minerals Development’s Cash Burn?
There are no prizes for guessing that we think Orissa Minerals Development’s cash burn is a bit of a worry. In particular, we think its cash runway suggests it isn’t in a good position to keep funding growth. And although we accept its increasing cash burn wasn’t as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Orissa Minerals Development’s CEO gets paid each year.
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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