We Think Prospect Resources (ASX:PSC) Can Afford To Drive Business Growth

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. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Prospect Resources (ASX:PSC) shareholders should 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Prospect Resources

Does Prospect Resources Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Prospect Resources last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth AU$21m. In the last year, its cash burn was AU$8.9m. That means it had a cash runway of about 2.4 years as of December 2023. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Is Prospect Resources' Cash Burn Changing Over Time?

Because Prospect Resources isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn dropping by 15% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Prospect Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Prospect Resources Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Prospect Resources to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Prospect Resources' cash burn of AU$8.9m is about 9.6% of its AU$93m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Prospect Resources' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Prospect Resources 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. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Prospect Resources (3 shouldn't be ignored!) that you should be aware of before investing here.

Of course Prospect Resources 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 with high insider ownership.

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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.