We Think Enduro Metals (CVE:ENDR) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. For example, Enduro Metals (CVE:ENDR) shareholders have done very well over the last year, with the share price soaring by 105%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Enduro Metals' cash burn is. 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). 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 Enduro Metals

How Long Is Enduro Metals' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Enduro Metals has such a small amount of debt that we'll set it aside, and focus on the CA$4.4m in cash it held at December 2020. Importantly, its cash burn was CA$8.6m over the trailing twelve months. Therefore, from December 2020 it had roughly 6 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Is Enduro Metals' Cash Burn Changing Over Time?

Because Enduro Metals isn't currently generating revenue, we consider it an early-stage 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. Given the length of the cash runway, we'd interpret the 29% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we're a bit cautious of Enduro Metals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For Enduro Metals To Raise More Cash For Growth?

While Enduro Metals 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. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Enduro Metals has a market capitalisation of CA$42m and burnt through CA$8.6m last year, which is 20% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Enduro Metals' Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Enduro Metals' cash burn reduction was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Enduro Metals (of which 2 shouldn't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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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