Here's Why We're Not Too Worried About Alderan Resources' (ASX:AL8) Cash Burn Situation

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. By way of example, Alderan Resources (ASX:AL8) has seen its share price rise 400% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for Alderan Resources shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Alderan Resources

How Long Is Alderan Resources' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Alderan Resources last reported its balance sheet in June 2020, it had zero debt and cash worth AU$2.3m. Importantly, its cash burn was AU$1.8m over the trailing twelve months. That means it had a cash runway of around 15 months as of June 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

How Is Alderan Resources' Cash Burn Changing Over Time?

Because Alderan Resources 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. The 64% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Alderan Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For Alderan Resources To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Alderan Resources' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive 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. 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.

Since it has a market capitalisation of AU$33m, Alderan Resources' AU$1.8m in cash burn equates to about 5.5% of its market value. 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.

Is Alderan Resources' Cash Burn A Worry?

Alderan Resources appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash burn relative to its market cap quite good, but its cash burn reduction was a real positive. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Alderan Resources (2 are potentially serious!) that you should be aware of before investing here.

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. 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.
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