We're Not Very Worried About EnviroLeach Technologies' (CSE:ETI) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should EnviroLeach Technologies (CSE:ETI) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for EnviroLeach Technologies

How Long Is EnviroLeach Technologies' 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. EnviroLeach Technologies has such a small amount of debt that we'll set it aside, and focus on the CA$5.5m in cash it held at December 2020. Importantly, its cash burn was CA$2.5m over the trailing twelve months. So it had a cash runway of about 2.2 years from December 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 EnviroLeach Technologies' Cash Burn Changing Over Time?

In our view, EnviroLeach Technologies doesn't yet produce significant amounts of operating revenue, since it reported just CA$817k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The 64% 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. EnviroLeach Technologies 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 Easily Can EnviroLeach Technologies Raise Cash?

While we're comforted by the recent reduction evident from our analysis of EnviroLeach Technologies' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive 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).

Since it has a market capitalisation of CA$48m, EnviroLeach Technologies' CA$2.5m in cash burn equates to about 5.2% of its market value. 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 EnviroLeach Technologies' Cash Burn?

As you can probably tell by now, we're not too worried about EnviroLeach Technologies' cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash runway was also very reassuring. 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 5 warning signs for EnviroLeach Technologies (2 are a bit unpleasant!) that you should be aware of before investing here.

Of course EnviroLeach Technologies 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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