We're Not Very Worried About Aqua Metals' (NASDAQ:AQMS) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Aqua Metals (NASDAQ:AQMS) shareholders have done very well over the last year, with the share price soaring by 161%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Aqua Metals' cash burn is too risky. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Aqua Metals

When Might Aqua Metals Run Out Of Money?

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 2021, Aqua Metals had cash of US$12m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$11m. Therefore, from March 2021 it had roughly 12 months of cash runway. Importantly, analysts think that Aqua Metals will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

How Is Aqua Metals' Cash Burn Changing Over Time?

In our view, Aqua Metals doesn't yet produce significant amounts of operating revenue, since it reported just US$90k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The 69% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Aqua Metals Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of Aqua Metals' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Aqua Metals' cash burn of US$11m is about 5.7% of its US$199m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Aqua Metals' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Aqua Metals is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. Its weak point is its cash runway, but even that wasn't too bad! Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Aqua Metals (of which 2 are significant!) 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)

When trading Aqua Metals or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on 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.