Stock Analysis

Will Sigma Lithium (NASDAQ:SGML) Spend Its Cash Wisely?

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NasdaqCM:SGML
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We can readily understand why investors are attracted to unprofitable companies. For example, Sigma Lithium (NASDAQ:SGML) shareholders have done very well over the last year, with the share price soaring by 239%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Sigma Lithium's cash burn is. 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.

Our analysis indicates that SGML is potentially overvalued!

When Might Sigma Lithium Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at September 2022, Sigma Lithium had cash of CA$85m and no debt. In the last year, its cash burn was CA$85m. Therefore, from September 2022 it had roughly 12 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
NasdaqCM:SGML Debt to Equity History November 30th 2022

How Is Sigma Lithium's Cash Burn Changing Over Time?

Because Sigma Lithium 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. Remarkably, it actually increased its cash burn by 471% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Sigma Lithium To Raise More Cash For Growth?

Given its cash burn trajectory, Sigma Lithium shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Sigma Lithium has a market capitalisation of CA$4.5b and burnt through CA$85m last year, which is 1.9% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Sigma Lithium's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Sigma Lithium's cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking a deeper dive, we've spotted 3 warning signs for Sigma Lithium you should be aware of, and 2 of them are significant.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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