Here's Why South Star Battery Metals (CVE:STS) Must Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should South Star Battery Metals (CVE:STS) 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'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for South Star Battery Metals

Does South Star Battery Metals Have A Long 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 March 2024, South Star Battery Metals had cash of CA$9.9m and no debt. In the last year, its cash burn was CA$17m. Therefore, from March 2024 it had roughly 7 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

How Hard Would It Be For South Star Battery Metals To Raise More Cash For Growth?

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Since it has a market capitalisation of CA$33m, South Star Battery Metals' CA$17m in cash burn equates to about 51% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About South Star Battery Metals' Cash Burn?

Given it's an early stage company, we don't have a lot of data with which to judge South Star Battery Metals' cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. Having said that, we can say that its cash burn relative to its market cap was a real negative. But in truth it seems to us that the company is burning cash rather quickly, which can create a need for costly capital raising. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for South Star Battery Metals (4 are a bit concerning!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com