We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 should MetalsTech (ASX:MTC) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for MetalsTech
When Might MetalsTech 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. When MetalsTech last reported its balance sheet in December 2022, it had zero debt and cash worth AU$3.1m. Looking at the last year, the company burnt through AU$4.5m. So it had a cash runway of approximately 8 months from December 2022. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
Can MetalsTech Raise More Cash Easily?
Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
MetalsTech's cash burn of AU$4.5m is about 7.1% of its AU$64m market capitalisation. 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.
How Risky Is MetalsTech's Cash Burn Situation?
Given it's an early stage company, we don't have a lot of data with which to judge MetalsTech's cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash burn relative to its market cap gave us comfort. Even though we don't think shareholders should be alarmed by its cash burn, we do think they should be keeping a close eye on it. Taking a deeper dive, we've spotted 5 warning signs for MetalsTech you should be aware of, and 3 of them don't sit too well with us.
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. 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.
About ASX:MTC
Medium-low with imperfect balance sheet.
