Stock Analysis

Here's Why We're Not At All Concerned With Stellar Resources' (ASX:SRZ) Cash Burn Situation

ASX:SRZ
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Just because a business does not make any money, does not mean that the stock will go down. For example, Stellar Resources (ASX:SRZ) shareholders have done very well over the last year, with the share price soaring by 278%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So notwithstanding the buoyant share price, we think it's well worth asking whether Stellar Resources' cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Stellar Resources

How Long Is Stellar Resources' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Stellar Resources had AU$2.3m in cash, and was debt-free. Looking at the last year, the company burnt through AU$663k. Therefore, from December 2020 it had 3.5 years of cash runway. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:SRZ Debt to Equity History June 10th 2021

How Is Stellar Resources' Cash Burn Changing Over Time?

Stellar Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. As it happens, the company's cash burn reduced by 11% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Stellar 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.

How Hard Would It Be For Stellar Resources To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Stellar Resources to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).

Stellar Resources has a market capitalisation of AU$28m and burnt through AU$663k last year, which is 2.4% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Stellar Resources' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Stellar Resources is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn reduction, but even that wasn't too bad! Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Stellar Resources (2 can't be ignored!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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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