Stock Analysis

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

ASX:IXR
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Just because a business does not make any money, does not mean that the stock will go down. Indeed, Ionic Rare Earths (ASX:IXR) stock is up 550% in the last year, providing strong gains for shareholders. 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 notwithstanding the buoyant share price, we think it's well worth asking whether Ionic Rare Earths' cash burn is too risky. 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 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. In June 2020, Ionic Rare Earths had AU$830k in cash, and was debt-free. Importantly, its cash burn was AU$1.3m over the trailing twelve months. So it had a cash runway of approximately 7 months from June 2020. 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. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
ASX:IXR Debt to Equity History March 9th 2021

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

Although Ionic Rare Earths reported revenue of AU$424 last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. Over the last year its cash burn actually increased by 47%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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?

Since its cash burn is moving in the wrong direction, Ionic Rare Earths shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.

Ionic Rare Earths' cash burn of AU$1.3m is about 0.8% of its AU$172m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Ionic Rare Earths' Cash Burn?

Even though its cash runway 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. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Ionic Rare Earths (4 make us uncomfortable!) that you should be aware of before investing here.

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.

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This article by Simply Wall St is general in nature. 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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