We Think Australian Potash (ASX:APC) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. Indeed, Australian Potash (ASX:APC) stock is up 160% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Australian Potash shareholders to consider whether its cash burn is concerning. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Australian Potash

When Might Australian Potash Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2020, Australian Potash had cash of AU$4.5m and no debt. Importantly, its cash burn was AU$7.8m over the trailing twelve months. So it had a cash runway of approximately 7 months from December 2020. Notably, analysts forecast that Australian Potash will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.

How Is Australian Potash's Cash Burn Changing Over Time?

In our view, Australian Potash doesn't yet produce significant amounts of operating revenue, since it reported just AU$163k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by a very significant 59%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Australian Potash Raise Cash?

Since its cash burn is moving in the wrong direction, Australian Potash shareholders may wish to think ahead to when the company may need to raise more cash. 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.

Since it has a market capitalisation of AU$73m, Australian Potash's AU$7.8m in cash burn equates to about 11% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Australian Potash's Cash Burn?

On this analysis of Australian Potash's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Separately, we looked at different risks affecting the company and spotted 7 warning signs for Australian Potash (of which 2 are a bit concerning!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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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