There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Australian Silica Quartz Group (ASX:ASQ) shareholders have done very well over the last year, with the share price soaring by 150%. 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 Silica Quartz Group's 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Australian Silica Quartz Group 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. As at December 2020, Australian Silica Quartz Group had cash of AU$6.2m and no debt. Looking at the last year, the company burnt through AU$941k. That means it had a cash runway of about 6.5 years as of December 2020. 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 Silica Quartz Group's Cash Burn Changing Over Time?
Although Australian Silica Quartz Group reported revenue of AU$119k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. With cash burn dropping by 8.2% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Admittedly, we're a bit cautious of Australian Silica Quartz Group due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Australian Silica Quartz Group Raise More Cash Easily?
While Australian Silica Quartz Group is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. 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.
Australian Silica Quartz Group's cash burn of AU$941k is about 3.3% of its AU$28m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Australian Silica Quartz Group's Cash Burn?
As you can probably tell by now, we're not too worried about Australian Silica Quartz Group's cash burn. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn reduction, but even that wasn't too bad! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking a deeper dive, we've spotted 4 warning signs for Australian Silica Quartz Group you should be aware of, and 1 of them is a bit unpleasant.
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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