Stock Analysis

Is Ironbark Zinc (ASX:IBG) In A Good Position To Deliver On Growth Plans?

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ASX:IBG
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Ironbark Zinc (ASX:IBG) shareholders have done very well over the last year, with the share price soaring by 105%. 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.

In light of its strong share price run, we think now is a good time to investigate how risky Ironbark Zinc's cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Ironbark Zinc

Does Ironbark Zinc 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 June 2021, Ironbark Zinc had cash of AU$2.5m and no debt. Looking at the last year, the company burnt through AU$2.3m. That means it had a cash runway of around 13 months as of June 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:IBG Debt to Equity History January 22nd 2022

How Is Ironbark Zinc's Cash Burn Changing Over Time?

Because Ironbark Zinc isn't currently generating revenue, we consider it an early-stage 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. Over the last year its cash burn actually increased by a very significant 71%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Ironbark Zinc makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Ironbark Zinc Raise Cash?

Given its cash burn trajectory, Ironbark Zinc shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Ironbark Zinc's cash burn of AU$2.3m is about 4.0% of its AU$59m market capitalisation. 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.

So, Should We Worry About Ironbark Zinc's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Ironbark Zinc's cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Ironbark Zinc's situation. Taking a deeper dive, we've spotted 6 warning signs for Ironbark Zinc you should be aware of, and 3 of them can't be ignored.

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.

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

Find out whether Ironbark Zinc 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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About ASX:IBG

Ironbark Zinc

Ironbark Zinc Limited explores for and evaluates mineral properties in Australia and Greenland.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation2
Future Growth0
Past Performance0
Financial Health4
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Adequate balance sheet and slightly overvalued.