We're A Little Worried About Evolution Energy Minerals' (ASX:EV1) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

So should Evolution Energy Minerals (ASX:EV1) shareholders be worried about its cash burn? 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.

See our latest analysis for Evolution Energy Minerals

When Might Evolution Energy Minerals Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2022, Evolution Energy Minerals had AU$10m in cash, and was debt-free. Importantly, its cash burn was AU$12m over the trailing twelve months. That means it had a cash runway of around 10 months as of December 2022. Notably, one analyst forecasts that Evolution Energy Minerals will break even (at a free cash flow level) in about 5 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Is Evolution Energy Minerals' Cash Burn Changing Over Time?

Evolution Energy Minerals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Its cash burn positively exploded in the last year, up 1,210%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Evolution Energy Minerals Raise More Cash Easily?

Given its cash burn trajectory, Evolution Energy Minerals shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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.

Evolution Energy Minerals' cash burn of AU$12m is about 35% of its AU$35m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Evolution Energy Minerals' Cash Burn A Worry?

We must admit that we don't think Evolution Energy Minerals is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash runway acceptable, we can't ignore the fact that we consider its increasing cash burn to be downright troublesome. One real positive is that at least one analyst is forecasting that the company will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, Evolution Energy Minerals has 5 warning signs (and 1 which is significant) we think you should know about.

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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.