Is Battery Minerals (ASX:BAT) In A Good Position To Deliver On Growth Plans?

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Battery Minerals (ASX:BAT) has seen its share price rise 271% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Battery Minerals' cash burn is too risky. 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). 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 Battery Minerals

Does Battery Minerals Have A Long Cash Runway?

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. When Battery Minerals last reported its balance sheet in June 2020, it had zero debt and cash worth AU$4.0m. In the last year, its cash burn was AU$4.9m. Therefore, from June 2020 it had roughly 10 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

How Is Battery Minerals' Cash Burn Changing Over Time?

While Battery Minerals did record statutory revenue of AU$66k over the last year, it didn't 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. The 67% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. Battery Minerals makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Battery Minerals Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of Battery Minerals' 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. 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.

Battery Minerals' cash burn of AU$4.9m is about 8.9% of its AU$55m market capitalisation. 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 Battery Minerals' Cash Burn A Worry?

On this analysis of Battery Minerals' cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Battery Minerals (4 make us uncomfortable!) that you should be aware of before investing here.

Of course Battery Minerals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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