We Think UEX (TSE:UEX) Can Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, UEX (TSE:UEX) has seen its share price rise 247% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

In light of its strong share price run, we think now is a good time to investigate how risky UEX's cash burn is. 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for UEX

When Might UEX Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In December 2020, UEX had CA$7.2m in cash, and was debt-free. In the last year, its cash burn was CA$3.7m. So it had a cash runway of approximately 23 months from December 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Is UEX's Cash Burn Changing Over Time?

While UEX did record statutory revenue of CA$42k 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. The 55% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. UEX 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 UEX Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of UEX's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Since it has a market capitalisation of CA$140m, UEX's CA$3.7m in cash burn equates to about 2.6% of its 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.

Is UEX's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way UEX is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Its cash runway wasn't quite as good, but was still rather encouraging! Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for UEX (2 are potentially serious!) that you should be aware of before investing here.

Of course UEX 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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