Strike Resources (ASX:SRK) Is In A Good Position To Deliver On Growth Plans

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. By way of example, Strike Resources (ASX:SRK) has seen its share price rise 141% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So notwithstanding the buoyant share price, we think it's well worth asking whether Strike Resources'cash burn is too risky In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Strike Resources

When Might Strike Resources Run Out Of Money?

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. In June 2020, Strike Resources had AU$3.4m in cash, and was debt-free. Importantly, its cash burn was AU$1.6m over the trailing twelve months. That means it had a cash runway of about 2.1 years as of June 2020. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Is Strike Resources' Cash Burn Changing Over Time?

Although Strike Resources reported revenue of AU$50k 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. With cash burn dropping by 6.2% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Strike Resources makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Strike Resources Raise More Cash Easily?

While Strike Resources is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Strike Resources' cash burn of AU$1.6m is about 6.0% of its AU$27m 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 Strike Resources' Cash Burn?

As you can probably tell by now, we're not too worried about Strike Resources' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. 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. Taking a deeper dive, we've spotted 5 warning signs for Strike Resources you should be aware of, and 2 of them can't be ignored.

Of course Strike Resources 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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