Stock Analysis

Ionic Rare Earths (ASX:IXR) Is In A Good Position To Deliver On Growth Plans

ASX:IXR
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We can readily understand why investors are attracted to unprofitable companies. For example, Ionic Rare Earths (ASX:IXR) shareholders have done very well over the last year, with the share price soaring by 138%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether Ionic Rare Earths' cash burn is too risky. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Ionic Rare Earths

When Might Ionic Rare Earths 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. As at June 2021, Ionic Rare Earths had cash of AU$11m and no debt. In the last year, its cash burn was AU$4.5m. That means it had a cash runway of about 2.5 years as of June 2021. That's decent, giving the company a couple years to develop its business. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:IXR Debt to Equity History October 19th 2021

How Is Ionic Rare Earths' Cash Burn Changing Over Time?

Although Ionic Rare Earths reported revenue of AU$214k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Its cash burn positively exploded in the last year, up 236%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Ionic Rare Earths makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Ionic Rare Earths Raise Cash?

Given its cash burn trajectory, Ionic Rare Earths shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Ionic Rare Earths has a market capitalisation of AU$129m and burnt through AU$4.5m last year, which is 3.5% 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.

Is Ionic Rare Earths' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Ionic Rare Earths' cash burn relative to its market cap was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 5 warning signs for Ionic Rare Earths you should be aware of, and 2 of them are potentially serious.

Of course Ionic Rare Earths 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.

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

Find out whether Ionic Rare Earths 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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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.

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