Here's Why We're Not Too Worried About Eastern Resources' (ASX:EFE) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Eastern Resources (ASX:EFE) has seen its share price rise 290% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Eastern Resources' cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Eastern Resources

How Long Is Eastern Resources' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2021, Eastern Resources had cash of AU$4.8m and no debt. Looking at the last year, the company burnt through AU$1.1m. So it had a cash runway of about 4.5 years from December 2021. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Is Eastern Resources' Cash Burn Changing Over Time?

In our view, Eastern Resources doesn't yet produce significant amounts of operating revenue, since it reported just AU$37.0 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 225%. We certainly hope for shareholders' sake that the money is well spent, because that kind of expenditure increase always makes us nervous. Eastern Resources 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 Eastern Resources Raise More Cash Easily?

Given its cash burn trajectory, Eastern Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).

Eastern Resources has a market capitalisation of AU$39m and burnt through AU$1.1m last year, which is 2.8% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Eastern Resources' Cash Burn?

As you can probably tell by now, we're not too worried about Eastern Resources' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. 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. 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. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Eastern Resources (of which 2 can't be ignored!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.