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. By way of example, Lithium Power International (ASX:LPI) has seen its share price rise 104% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So notwithstanding the buoyant share price, we think it's well worth asking whether Lithium Power International's 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Lithium Power International Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Lithium Power International had AU$11m in cash, and was debt-free. Importantly, its cash burn was AU$1.6m over the trailing twelve months. That means it had a cash runway of about 7.0 years as of December 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
How Is Lithium Power International's Cash Burn Changing Over Time?
Because Lithium Power International isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The 62% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. 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.
Can Lithium Power International Raise More Cash Easily?
There's no doubt Lithium Power International's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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.
Since it has a market capitalisation of AU$84m, Lithium Power International's AU$1.6m in cash burn equates to about 1.9% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Lithium Power International's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Lithium Power International is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn reduction was also very reassuring. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Lithium Power International that potential shareholders should take into account before putting money into a stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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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