We Think Australian Strategic Materials (ASX:ASM) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Australian Strategic Materials (ASX:ASM) stock is up 254% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Australian Strategic Materials' cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Australian Strategic Materials

Does Australian Strategic Materials Have A Long 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. In June 2021, Australian Strategic Materials had AU$93m in cash, and was debt-free. Looking at the last year, the company burnt through AU$14m. So it had a cash runway of about 6.6 years from June 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Is Australian Strategic Materials' Cash Burn Changing Over Time?

Whilst it's great to see that Australian Strategic Materials has already begun generating revenue from operations, last year it only produced AU$1.4m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Its cash burn positively exploded in the last year, up 321%. We certainly hope for shareholders' sake that the money is well spent, because that kind of expenditure increase always makes us nervous. Australian Strategic Materials 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 Australian Strategic Materials Raise More Cash Easily?

While Australian Strategic Materials does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. 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 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.

Australian Strategic Materials' cash burn of AU$14m is about 0.8% of its AU$1.9b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Australian Strategic Materials' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Australian Strategic Materials' cash burn. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking an in-depth view of risks, we've identified 3 warning signs for Australian Strategic Materials 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)

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.

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