Is Energy Resources of Australia (ASX:ERA) In A Good Position To Deliver On Growth Plans?

We can readily understand why investors are attracted to unprofitable companies. 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, the natural question for Energy Resources of Australia (ASX:ERA) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Energy Resources of Australia

How Long Is Energy Resources of Australia's Cash Runway?

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 Energy Resources of Australia last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth AU$217m. Importantly, its cash burn was AU$223m over the trailing twelve months. So it had a cash runway of approximately 12 months from December 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Energy Resources of Australia Growing?

Energy Resources of Australia boosted investment sharply in the last year, with cash burn ramping by 52%. As if that's not bad enough, the operating revenue also dropped by 38%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how Energy Resources of Australia has developed its business over time by checking this visualization of its revenue and earnings history.

Can Energy Resources of Australia Raise More Cash Easily?

Energy Resources of Australia revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. 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. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Energy Resources of Australia has a market capitalisation of AU$1.1b and burnt through AU$223m last year, which is 21% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Energy Resources of Australia's Cash Burn A Worry?

Energy Resources of Australia is not in a great position when it comes to its cash burn situation. While its cash burn relative to its market cap wasn't too bad, its falling revenue does leave us rather nervous. Summing up, we think the Energy Resources of Australia's cash burn is a risk, based on the factors we mentioned in this article. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Energy Resources of Australia that potential shareholders should take into account before putting money into a stock.

Of course Energy Resources of Australia 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.

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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.