We can readily understand why investors are attracted to unprofitable companies. By way of example, Orissa Minerals Development (NSE:ORISSAMINE) has seen its share price rise 112% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given its strong share price performance, we think it’s worthwhile for Orissa Minerals Development shareholders to consider whether its cash burn is concerning. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
How Long Is Orissa Minerals Development’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 September 2019, Orissa Minerals Development had cash of ₹2.1b and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through ₹5.6b. So it had a cash runway of approximately 5 months from 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.
How Is Orissa Minerals Development’s Cash Burn Changing Over Time?
Orissa Minerals Development didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 39%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we’re a bit cautious of Orissa Minerals Development due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Orissa Minerals Development Raise More Cash Easily?
Given its cash burn trajectory, Orissa Minerals Development shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. 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.
Orissa Minerals Development’s cash burn of ₹5.6b is about 59% of its ₹9.5b market capitalisation. 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).
How Risky Is Orissa Minerals Development’s Cash Burn Situation?
As you can probably tell by now, we’re rather concerned about Orissa Minerals Development’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. Taking a deeper dive, we’ve spotted 3 warning signs for Orissa Minerals Development you should be aware of, and 2 of them are a bit unpleasant.
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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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. Thank you for reading.