We’re A Little Worried About ECR Minerals’s (LON:ECR) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should ECR Minerals (LON:ECR) shareholders be worried about its cash burn? 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). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for ECR Minerals

How Long Is ECR Minerals’s Cash Runway?

A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When ECR Minerals last reported its balance sheet in September 2019, it had zero debt and cash worth UK£282k. Looking at the last year, the company burnt through UK£1.2m. That means it had a cash runway of around 3 months as of September 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. Depicted below, you can see how its cash holdings have changed over time.

AIM:ECR Historical Debt April 7th 2020
AIM:ECR Historical Debt April 7th 2020

How Is ECR Minerals’s Cash Burn Changing Over Time?

Because ECR Minerals 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. With the cash burn rate up 40% in the last year, it seems that the company is ratcheting up investment in the business over time. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Admittedly, we’re a bit cautious of ECR Minerals due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can ECR Minerals Raise Cash?

Since its cash burn is moving in the wrong direction, ECR Minerals shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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£2.1m, ECR Minerals’s UK£1.2m in cash burn equates to about 56% of its market value. That’s high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About ECR Minerals’s Cash Burn?

As you can probably tell by now, we’re rather concerned about ECR Minerals’s cash burn. In particular, we think its cash runway suggests it isn’t in a good position to keep funding growth. And although we accept its increasing cash burn wasn’t as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. The measures we’ve considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. On another note, ECR Minerals has 5 warning signs (and 3 which make us uncomfortable) we think 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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