Companies Like Auroch Minerals (ASX:AOU) Can Be Considered Quite Risky

Just because a business does not make any money, does not mean that the stock will go down. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Auroch Minerals (ASX:AOU) shareholders should 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Auroch Minerals

How Long Is Auroch Minerals's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Auroch Minerals last reported its balance sheet in June 2019, it had zero debt and cash worth AU$1.7m. In the last year, its cash burn was AU$3.6m. Therefore, from June 2019 it had roughly 6 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. The image below shows how its cash balance has been changing over the last few years.

How Is Auroch Minerals's Cash Burn Changing Over Time?

Whilst it's great to see that Auroch Minerals has already begun generating revenue from operations, last year it only produced AU$25k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Over the last year its cash burn actually increased by a very significant 63%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Auroch Minerals 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.

Can Auroch Minerals Raise More Cash Easily?

Given its cash burn trajectory, Auroch Minerals shareholders should already be thinking about how easy it might be for it to raise further 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. Commonly, a business will sell new shares in itself to raise cash to drive 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).

Since it has a market capitalisation of AU$8.1m, Auroch Minerals's AU$3.6m in cash burn equates to about 44% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

How Risky Is Auroch Minerals's Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Auroch Minerals's cash burn. 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. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Auroch Minerals insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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