Stock Analysis

Is ioneer (ASX:INR) In A Good Position To Invest In Growth?

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ASX:INR
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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, the natural question for ioneer (ASX:INR) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

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Does ioneer 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. When ioneer last reported its balance sheet in June 2020, it had zero debt and cash worth AU$38m. Looking at the last year, the company burnt through AU$52m. Therefore, from June 2020 it had roughly 9 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:INR Debt to Equity History February 1st 2021

How Is ioneer's Cash Burn Changing Over Time?

Because ioneer isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 40%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. 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.

How Hard Would It Be For ioneer To Raise More Cash For Growth?

Since its cash burn is moving in the wrong direction, ioneer shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Since it has a market capitalisation of AU$607m, ioneer's AU$52m in cash burn equates to about 8.5% of its market value. 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 ioneer's Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought ioneer's cash burn relative to its market cap was relatively promising. Summing up, we think the ioneer's cash burn is a risk, based on the factors we mentioned in this article. On another note, ioneer has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

Of course ioneer 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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