Stock Analysis

S2 Resources (ASX:S2R) Is In A Good Position To Deliver On Growth Plans

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ASX:S2R
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Just because a business does not make any money, does not mean that the stock will go down. Indeed, S2 Resources (ASX:S2R) stock is up 120% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So notwithstanding the buoyant share price, we think it's well worth asking whether S2 Resources' 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for S2 Resources

How Long Is S2 Resources' Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When S2 Resources last reported its balance sheet in December 2020, it had zero debt and cash worth AU$15m. In the last year, its cash burn was AU$4.6m. So it had a cash runway of about 3.1 years from December 2020. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
ASX:S2R Debt to Equity History March 16th 2021

How Is S2 Resources' Cash Burn Changing Over Time?

Because S2 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. Even though it doesn't get us excited, the 26% reduction in cash burn year on year does suggest the company can continue operating for quite some time. S2 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.

Can S2 Resources Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for S2 Resources to raise more cash in the future. 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 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).

Since it has a market capitalisation of AU$54m, S2 Resources' AU$4.6m in cash burn equates to about 8.6% of its 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.

So, Should We Worry About S2 Resources' Cash Burn?

As you can probably tell by now, we're not too worried about S2 Resources' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for S2 Resources that investors should know when investing in the stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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