Here's Why We're Not Too Worried About Argentina Lithium & Energy's (CVE:LIT) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. By way of example, Argentina Lithium & Energy (CVE:LIT) has seen its share price rise 633% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Argentina Lithium & Energy's cash burn is. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Argentina Lithium & Energy

How Long Is Argentina Lithium & Energy's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2021, Argentina Lithium & Energy had cash of CA$508k and no debt. In the last year, its cash burn was CA$468k. That means it had a cash runway of around 13 months as of June 2021. 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. The image below shows how its cash balance has been changing over the last few years.

How Is Argentina Lithium & Energy's Cash Burn Changing Over Time?

Argentina Lithium & Energy 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. Over the last year its cash burn actually increased by a very significant 76%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Argentina Lithium & Energy makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Argentina Lithium & Energy Raise More Cash Easily?

Given its cash burn trajectory, Argentina Lithium & Energy shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. 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).

Since it has a market capitalisation of CA$30m, Argentina Lithium & Energy's CA$468k in cash burn equates to about 1.5% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Argentina Lithium & Energy's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Argentina Lithium & Energy's cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Argentina Lithium & Energy has 5 warning signs (and 2 which are concerning) we think you should know about.

Of course Argentina Lithium & Energy 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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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