Here's Why We're Watching IberAmerican Lithium's (FRA:W2C) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether IberAmerican Lithium (FRA:W2C) shareholders should 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'. 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 IberAmerican Lithium

Does IberAmerican Lithium Have A Long 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. As at December 2023, IberAmerican Lithium had cash of CA$3.4m and no debt. Importantly, its cash burn was CA$4.6m over the trailing twelve months. So it had a cash runway of approximately 9 months from December 2023. 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.

Can IberAmerican Lithium Raise More Cash Easily?

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.

IberAmerican Lithium has a market capitalisation of CA$28m and burnt through CA$4.6m last year, which is 16% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About IberAmerican Lithium's Cash Burn?

Given it's an early stage company, we don't have a lot of data with which to judge IberAmerican Lithium's cash burn. We would undoubtedly be more comfortable if it had reported some operating revenue. But generally speaking, we can say that early stage companies like IberAmerican Lithium are generally higher risk than well established businesses. To us, there is clearly a substantial risk that that the company will have to raise costly funding, making it very hard to quantify the potential upside. Separately, we looked at different risks affecting the company and spotted 5 warning signs for IberAmerican Lithium (of which 2 are a bit unpleasant!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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. 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.