Stock Analysis

We Think Ironbark Zinc (ASX:IBG) Can Afford To Drive Business Growth

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ASX:IBG
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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, Ironbark Zinc (ASX:IBG) shareholders have done very well over the last year, with the share price soaring by 214%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

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. 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 Ironbark Zinc

When Might Ironbark Zinc Run Out Of Money?

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. When Ironbark Zinc last reported its balance sheet in December 2020, it had zero debt and cash worth AU$1.4m. In the last year, its cash burn was AU$1.3m. So it had a cash runway of approximately 13 months from December 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:IBG Debt to Equity History May 17th 2021

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

Ironbark Zinc didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 41% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Ironbark Zinc due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Ironbark Zinc Raise More Cash Easily?

While Ironbark Zinc is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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.

Ironbark Zinc's cash burn of AU$1.3m is about 5.1% of its AU$26m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Ironbark Zinc's Cash Burn A Worry?

Ironbark Zinc appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash burn reduction, while on the other it can also boast very strong cash burn relative to its market cap. 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 5 warning signs for Ironbark Zinc you should be aware of, and 2 of them are a bit concerning.

Of course Ironbark Zinc 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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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.