Companies Like Alba Mineral Resources (LON:ALBA) Are In A Position To Invest In Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Alba Mineral Resources (LON:ALBA) shareholders have done very well over the last year, with the share price soaring by 239%. 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 Alba Mineral Resources' 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Alba Mineral Resources

How Long Is Alba Mineral Resources' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at November 2020, Alba Mineral Resources had cash of UK£1.5m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through UK£590k. That means it had a cash runway of about 2.6 years as of November 2020. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Is Alba Mineral Resources' Cash Burn Changing Over Time?

Because Alba Mineral Resources isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 25% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Alba Mineral Resources 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 Easily Can Alba Mineral Resources Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Alba Mineral Resources to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of UK£16m, Alba Mineral Resources' UK£590k in cash burn equates to about 3.6% of its market value. 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.

So, Should We Worry About Alba Mineral Resources' Cash Burn?

As you can probably tell by now, we're not too worried about Alba Mineral Resources' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. And even though its cash burn reduction 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, which seems to be under control. Taking a deeper dive, we've spotted 4 warning signs for Alba Mineral Resources you should be aware of, and 2 of them don't sit too well with us.

Of course Alba Mineral Resources 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.

If you’re looking to trade Alba Mineral Resources, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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