We're Hopeful That Aeris Environmental (ASX:AEI) Will Use Its Cash Wisely

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Aeris Environmental (ASX:AEI) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Aeris Environmental

Does Aeris Environmental Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. Aeris Environmental has such a small amount of debt that we'll set it aside, and focus on the AU$12m in cash it held at June 2021. Looking at the last year, the company burnt through AU$1.4m. That means it had a cash runway of about 8.4 years as of June 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Well Is Aeris Environmental Growing?

We reckon the fact that Aeris Environmental managed to shrink its cash burn by 34% over the last year is rather encouraging. But it makes us pessimistic to see that operating revenue slid 51% in that time. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Aeris Environmental is building its business over time.

Can Aeris Environmental Raise More Cash Easily?

While Aeris Environmental seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and 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.

Aeris Environmental's cash burn of AU$1.4m is about 4.9% of its AU$28m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Aeris Environmental's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Aeris Environmental is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its falling revenue to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. An in-depth examination of risks revealed 2 warning signs for Aeris Environmental that readers should think about before committing capital to this stock.

Of course Aeris Environmental 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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.