We're Hopeful That Queensland Pacific Metals (ASX:QPM) Will Use Its Cash Wisely

Just because a business does not make any money, does not mean that the stock will go down. For example, Queensland Pacific Metals (ASX:QPM) shareholders have done very well over the last year, with the share price soaring by 162%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Queensland Pacific Metals' 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.

See our latest analysis for Queensland Pacific Metals

How Long Is Queensland Pacific Metals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Queensland Pacific Metals last reported its balance sheet in December 2021, it had zero debt and cash worth AU$47m. Looking at the last year, the company burnt through AU$24m. That means it had a cash runway of about 2.0 years as of December 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Is Queensland Pacific Metals' Cash Burn Changing Over Time?

While Queensland Pacific Metals did record statutory revenue of AU$2.0m over the last year, it didn't 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. Remarkably, it actually increased its cash burn by 1,152% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Admittedly, we're a bit cautious of Queensland Pacific Metals due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Queensland Pacific Metals Raise More Cash Easily?

While Queensland Pacific Metals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking 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. Many companies end up issuing new shares to fund future 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.

Queensland Pacific Metals has a market capitalisation of AU$347m and burnt through AU$24m last year, which is 6.9% of the company's market value. 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 Queensland Pacific Metals' Cash Burn A Worry?

On this analysis of Queensland Pacific Metals' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Queensland Pacific Metals' situation. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Queensland Pacific Metals (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course Queensland Pacific Metals 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. 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.