We Think GreenX Metals (ASX:GRX) Can Afford To Drive Business Growth

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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?

So, the natural question for GreenX Metals (ASX:GRX) shareholders is whether they should be concerned by its rate of cash burn. 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.

Check out our latest analysis for GreenX Metals

How Long Is GreenX Metals' 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 June 2021, GreenX Metals had cash of AU$5.0m and no debt. In the last year, its cash burn was AU$2.2m. So it had a cash runway of about 2.2 years from June 2021. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Is GreenX Metals' Cash Burn Changing Over Time?

Whilst it's great to see that GreenX Metals has already begun generating revenue from operations, last year it only produced AU$298k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 40% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of GreenX Metals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can GreenX Metals Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for GreenX Metals to raise more cash in the future. 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.

GreenX Metals has a market capitalisation of AU$67m and burnt through AU$2.2m last year, which is 3.3% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is GreenX Metals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way GreenX Metals is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash burn reduction wasn't quite as good, but was still rather encouraging! Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Separately, we looked at different risks affecting the company and spotted 4 warning signs for GreenX Metals (of which 1 is a bit concerning!) you should know about.

Of course GreenX Metals 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. 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.