We're Not Worried About Legacy Iron Ore's (ASX:LCY) Cash Burn

Just because a business does not make any money, does not mean that the stock will go down. For example, Legacy Iron Ore (ASX:LCY) shareholders have done very well over the last year, with the share price soaring by 1,850%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Legacy Iron Ore shareholders to consider whether its cash burn is concerning. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Legacy Iron Ore

Does Legacy Iron Ore Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Legacy Iron Ore last reported its balance sheet in September 2020, it had zero debt and cash worth AU$7.7m. In the last year, its cash burn was AU$2.4m. That means it had a cash runway of about 3.2 years as of September 2020. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Is Legacy Iron Ore's Cash Burn Changing Over Time?

Although Legacy Iron Ore had revenue of AU$161k in the last twelve months, its operating revenue was only AU$86k in that time period. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. Over the last year its cash burn actually increased by 29%, 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. Admittedly, we're a bit cautious of Legacy Iron Ore due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For Legacy Iron Ore To Raise More Cash For Growth?

Given its cash burn trajectory, Legacy Iron Ore 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. 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.

Legacy Iron Ore's cash burn of AU$2.4m is about 0.9% of its AU$256m 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.

How Risky Is Legacy Iron Ore's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Legacy Iron Ore's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking a deeper dive, we've spotted 4 warning signs for Legacy Iron Ore you should be aware of, and 2 of them are a bit concerning.

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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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