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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for GreenX Metals (ASX:GRX) shareholders is whether they should be concerned by its rate of cash burn. 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.
When Might GreenX Metals Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In December 2021, GreenX Metals had AU$4.2m in cash, and was debt-free. Looking at the last year, the company burnt through AU$2.9m. So it had a cash runway of approximately 17 months from December 2021. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.
How Is GreenX Metals’ Cash Burn Changing Over Time?
Whilst it’s great to see that GreenX Metals has already begun generating revenue from operations, last year it only produced AU$243k, so we don’t think it is generating significant revenue, at this point. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. As it happens, the company’s cash burn reduced by 2.1% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Admittedly, we’re a bit cautious of GreenX Metals 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 GreenX Metals Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for GreenX Metals to raise more cash in the future. 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.
Since it has a market capitalisation of AU$48m, GreenX Metals’ AU$2.9m in cash burn equates to about 6.0% of its market value. 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 GreenX Metals’ Cash Burn?
GreenX Metals appears to be in pretty good health when it comes to its cash burn situation. One the one hand we have its solid cash runway, while on the other it can also boast very strong cash burn relative to its market cap. While we’re the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about GreenX Metals’ situation. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for GreenX Metals (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.