Yahoo Finance When Will Core Lithium Ltd. (ASX:CXO) Run Out Of Cash?
Core Lithium Ltd. (ASX:CXO) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Core Lithium is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Core Lithium may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
View our latest analysis for Core Lithium
What is cash burn?
With a negative free cash flow of -AU$9.6m, Core Lithium is chipping away at its AU$4.4m cash reserves in order to run its business. The riskiest factor facing investors of Core Lithium is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the highly risky metals and mining industry often face this problem, and Core Lithium is no exception. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will Core Lithium need to raise more cash?
We can measure Core Lithium's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Free cash outflows declined by 60% over the past year, which could be an indication of Core Lithium putting the brakes on ramping up high growth. Given the level of cash left in the bank, if Core Lithium maintained its cash burn rate of -AU$9.6m, it could still run out of cash within the next few of months. Even though this is analysis is fairly basic, and Core Lithium still can cut its overhead further, or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the Core Lithium operation is, and when things may have to change.
Next Steps:
Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. This may lead to share price pressure in the near term, should Core Lithium be forced to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how CXO is expected to perform in the future. I recommend you continue to research Core Lithium to get a more holistic view of the company by looking at:
Historical Performance: What has CXO's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Core Lithium’s board and the CEO’s back ground.
Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2018. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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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. Thank you for reading.
