Yahoo Finance Companies Like Metallica Minerals (ASX:MLM) Can Be Considered Quite Risky
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So, the natural question for Metallica Minerals (ASX:MLM) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for Metallica Minerals
How Long Is Metallica Minerals's 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. In December 2019, Metallica Minerals had AU$2.0m in cash, and was debt-free. Looking at the last year, the company burnt through AU$2.9m. Therefore, from December 2019 it had roughly 8 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. You can see how its cash balance has changed over time in the image below.
How Is Metallica Minerals's Cash Burn Changing Over Time?
In our view, Metallica Minerals doesn't yet produce significant amounts of operating revenue, since it reported just AU$136k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 16% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Metallica Minerals makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Metallica Minerals Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Metallica Minerals 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. Many companies end up issuing new shares to fund future 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).
Metallica Minerals has a market capitalisation of AU$3.2m and burnt through AU$2.9m last year, which is 91% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
So, Should We Worry About Metallica Minerals's Cash Burn?
On this analysis of Metallica Minerals's cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. Taking a deeper dive, we've spotted 5 warning signs for Metallica Minerals you should be aware of, and 3 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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