Stock Analysis

Will Element 25 (ASX:E25) Spend Its Cash Wisely?

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ASX:E25
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Element 25 (ASX:E25) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. 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 Element 25

How Long Is Element 25's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Element 25 last reported its balance sheet in December 2021, it had zero debt and cash worth AU$31m. In the last year, its cash burn was AU$26m. So it had a cash runway of approximately 14 months from December 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
ASX:E25 Debt to Equity History April 8th 2022

How Is Element 25's Cash Burn Changing Over Time?

In our view, Element 25 doesn't yet produce significant amounts of operating revenue, since it reported just AU$11m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Its cash burn positively exploded in the last year, up 203%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Element 25 has developed its business over time by checking this visualization of its revenue and earnings history.

Can Element 25 Raise More Cash Easily?

While Element 25 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. Companies can raise capital through either debt or equity. 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.

Element 25's cash burn of AU$26m is about 16% of its AU$160m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Element 25's Cash Burn?

On this analysis of Element 25's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. 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 4 warning signs for Element 25 (of which 2 make us uncomfortable!) you should know about.

Of course Element 25 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.

Valuation is complex, but we're helping make it simple.

Find out whether Element 25 is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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