We're A Little Worried About Energy Resources of Australia's (ASX:ERA) Cash Burn Rate

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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Energy Resources of Australia (ASX:ERA) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Energy Resources of Australia

When Might Energy Resources of Australia Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Energy Resources of Australia last reported its balance sheet in June 2023, it had zero debt and cash worth AU$327m. In the last year, its cash burn was AU$226m. So it had a cash runway of approximately 17 months from June 2023. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Well Is Energy Resources of Australia Growing?

One thing for shareholders to keep front in mind is that Energy Resources of Australia increased its cash burn by 282% in the last twelve months. If that's not bad enough, it actually saw operating revenue decrease by a whopping 89% over the last year, suggesting the company is going through some sort of dangerous transition. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Energy Resources of Australia is building its business over time.

How Hard Would It Be For Energy Resources of Australia To Raise More Cash For Growth?

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. 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.

Energy Resources of Australia's cash burn of AU$226m is about 32% of its AU$709m market capitalisation. 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.

How Risky Is Energy Resources of Australia's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Energy Resources of Australia's cash runway was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Taking an in-depth view of risks, we've identified 4 warning signs for Energy Resources of Australia that you should be aware of before investing.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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.