Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Asiamet Resources (LON:ARS) shareholders is whether they should be concerned by its rate of cash burn. 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
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How Long Is Asiamet Resources’ Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. Asiamet Resources has such a small amount of debt that we’ll set it aside, and focus on the US$2.0m in cash it held at June 2020. In the last year, its cash burn was US$3.9m. Therefore, from June 2020 it had roughly 6 months of cash runway. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Asiamet Resources’ Cash Burn Changing Over Time?
Because Asiamet Resources 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. The 56% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. 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.
How Hard Would It Be For Asiamet Resources To Raise More Cash For Growth?
There’s no doubt Asiamet Resources’ rapidly reducing cash burn brings comfort, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further growth. 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. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Asiamet Resources’ cash burn of US$3.9m is about 8.3% of its US$46m market capitalisation. 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.
How Risky Is Asiamet Resources’ Cash Burn Situation?
On this analysis of Asiamet Resources’ cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. We don’t think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Asiamet Resources (2 are a bit concerning!) that you should be aware of before investing here.
Of course Asiamet 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.
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.
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