Yahoo Finance Enterprise Metals Limited's (ASX:ENT) Single Biggest Risk For Investors
As the AU$4.0m market cap Enterprise Metals Limited (ASX:ENT) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined Enterprise Metals’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
View our latest analysis for Enterprise Metals
What is cash burn?
Enterprise Metals currently has AU$278k in the bank, with negative free cash flow of -AU$528.6k. The riskiest factor facing investors of Enterprise Metals 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 Enterprise Metals is no exception. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Enterprise Metals need to raise more cash?
One way to measure the cost to Enterprise Metals of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
Over the last twelve months, free cash outflows (excluding one-offs) increased by 28%, which is high. This means that, if Enterprise Metals continues to burn cash at this rate, given how much money it currently has in the bank, it may actually need to raise capital again within the next couple of months! This is also the case if Enterprise Metals maintains its free cash outflows level of -AU$528.6k, without growth, going forward. Although this is a relatively simplistic calculation, and Enterprise Metals could reduce its costs or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the Enterprise Metals operation is, and when things may have to change.
Next Steps:
Loss-making companies are riskier, especially those that are still growing its cash burn at a high rate. This doesn't mean you should avoid a loss-making stock forever - but it's something to be aware of. The cash burn analysis result indicates a cash constraint for the company, due to its high cash burn growth and its level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Enterprise Metals raise capital to fund its growth. Keep in mind I haven't considered other factors such as how ENT is expected to perform in the future. You should continue to research Enterprise Metals to get a better picture of the company by looking at:
Historical Performance: What has ENT'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 Enterprise Metals’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.
