There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Sky Metals (ASX:SKY) shareholders have done very well over the last year, with the share price soaring by 105%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
In light of its strong share price run, we think now is a good time to investigate how risky Sky Metals' cash burn is. 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.
See our latest analysis for Sky Metals
Does Sky Metals Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2020, Sky Metals had cash of AU$10m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was AU$4.0m. So it had a cash runway of about 2.6 years from June 2020. That's decent, giving the company a couple years to develop its business. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. The image below shows how its cash balance has been changing over the last few years.
How Is Sky Metals' Cash Burn Changing Over Time?
While Sky Metals did record statutory revenue of AU$56k 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 1,624% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Sky Metals 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 Sky Metals Raise Cash?
While Sky 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. Companies can raise capital through either debt or equity. 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.
Sky Metals' cash burn of AU$4.0m is about 6.6% of its AU$61m 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 Sky Metals' Cash Burn A Worry?
On this analysis of Sky Metals' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Sky Metals has 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
Of course Sky 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. 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.
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About ASX:SKY
Sky Metals
Engages in the exploration and development of mineral resources in Australia.
Flawless balance sheet slight.
