We're Not Worried About Red Hill Minerals' (ASX:RHI) Cash Burn

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Red Hill Minerals (ASX:RHI) 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 Red Hill Minerals

Does Red Hill Minerals Have A Long Cash Runway?

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 Red Hill Minerals last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth AU$23m. Importantly, its cash burn was AU$4.9m over the trailing twelve months. Therefore, from December 2023 it had 4.7 years of cash runway. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

How Is Red Hill Minerals' Cash Burn Changing Over Time?

Although Red Hill Minerals reported revenue of AU$1.3m last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. From a cash flow perspective, it's great to see the company's cash burn dropped by 89% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we're a bit cautious of Red Hill Minerals due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For Red Hill Minerals To Raise More Cash For Growth?

There's no doubt Red Hill Minerals' 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. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Red Hill Minerals' cash burn of AU$4.9m is about 1.3% of its AU$384m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Red Hill Minerals' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Red Hill Minerals is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking an in-depth view of risks, we've identified 1 warning sign for Red Hill Minerals that you should be aware of before investing.

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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.