We're Hopeful That BlackEarth Minerals (ASX:BEM) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. Indeed, BlackEarth Minerals (ASX:BEM) stock is up 300% in the last year, providing strong gains for shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given its strong share price performance, we think it's worthwhile for BlackEarth Minerals shareholders to consider whether its cash burn is concerning. 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 BlackEarth Minerals

Does BlackEarth Minerals 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, BlackEarth Minerals had cash of AU$2.0m and no debt. In the last year, its cash burn was AU$1.3m. That means it had a cash runway of around 19 months as of December 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Is BlackEarth Minerals' Cash Burn Changing Over Time?

While BlackEarth Minerals did record statutory revenue of AU$123k over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. Even though it doesn't get us excited, the 52% reduction in cash burn year on year does suggest the company can continue operating for quite some time. BlackEarth 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 BlackEarth Minerals Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of BlackEarth 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$30m, BlackEarth Minerals' AU$1.3m in cash burn equates to about 4.2% of its market value. 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 BlackEarth Minerals' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about BlackEarth Minerals' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash runway wasn't quite as good, but was still rather encouraging! Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for BlackEarth Minerals (3 shouldn't be ignored!) that you should be aware of before investing here.

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)

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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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