We're Not Very Worried About Imperial Metals' (TSE:III) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. For example, Imperial Metals (TSE:III) shareholders have done very well over the last year, with the share price soaring by 172%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for Imperial Metals shareholders to consider whether its cash burn is concerning. 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Imperial Metals

Does Imperial Metals Have A Long Cash Runway?

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. When Imperial Metals last reported its balance sheet in September 2020, it had zero debt and cash worth CA$61m. Importantly, its cash burn was CA$32m over the trailing twelve months. That means it had a cash runway of around 23 months as of September 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. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. The image below shows how its cash balance has been changing over the last few years.

Is Imperial Metals' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Imperial Metals actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Happily for shareholders, the revenue is up a stonking 100% over the last year. While the past is always worth studying, it is the future that matters most of all. 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 Imperial Metals To Raise More Cash For Growth?

While Imperial Metals' revenue growth truly does shine bright, it's important not to ignore the possibility that it might need more cash, at some point, even if only to optimise its growth plans. Companies can raise capital through either debt or equity. 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.

Imperial Metals' cash burn of CA$32m is about 5.3% of its CA$608m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Imperial Metals' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Imperial Metals' cash burn. For example, we think its revenue growth suggests that the company is on a good path. And even though its cash runway wasn't quite as impressive, it was still a positive. 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. An in-depth examination of risks revealed 2 warning signs for Imperial Metals that readers should think about before committing capital to this stock.

Of course Imperial Metals 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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