Companies Like Santana Minerals (ASX:SMI) Are In A Position To Invest In 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Santana Minerals (ASX:SMI) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

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Does Santana 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. In December 2024, Santana Minerals had AU$31m in cash, and was debt-free. In the last year, its cash burn was AU$18m. Therefore, from December 2024 it had roughly 21 months of cash runway. Notably, analysts forecast that Santana Minerals will break even (at a free cash flow level) in about 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.

View our latest analysis for Santana Minerals

How Is Santana Minerals' Cash Burn Changing Over Time?

Santana Minerals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With the cash burn rate up 40% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

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

Given its cash burn trajectory, Santana Minerals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 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.

Santana Minerals' cash burn of AU$18m is about 4.3% of its AU$416m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Santana Minerals' Cash Burn?

On this analysis of Santana Minerals' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Santana Minerals (of which 1 is a bit unpleasant!) you should know about.

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)

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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.