Yahoo Finance Will Fin Resources Limited (ASX:FIN) Need To Raise More Money?
As the AU$3.8m market cap Fin Resources Limited (ASX:FIN) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Selling new shares may dilute the value of existing shares on issue, and since Fin Resources is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Fin Resources’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
Check out our latest analysis for Fin Resources
What is cash burn?
Fin Resources currently has AU$4.0m in the bank, with negative free cash flow of -AU$657.9k. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Furthermore, it is not uncommon to find loss-makers in an industry such as metals and mining. 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 Fin Resources need to raise more cash?
One way to measure the cost to Fin Resources 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 increased by 12%, which is relatively reasonable for a small-cap company. My cash burn analysis suggests that, if Fin Resources continues to spend its cash reserves at this current high rate, it may have to raise capital within the upcoming months, which may be a surprise to some shareholders. But if free cash outflows are maintained at the current level of -AU$657.9k, then Fin Resources will not need to raise capital any time within the next three years. Although this is a relatively simplistic calculation, and Fin Resources could reduce its costs or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the Fin Resources operation is, and when things may have to change.
Next Steps:
The risks involved in investing in loss-making Fin Resources means you should think twice before diving into the stock. However, this should not prevent you from further researching its investment potential. The outcome of my analysis suggests that if the company maintains the rate of cash burn growth, it will run out of cash within the year. This suggests an opportunity to enter into the stock, potentially at an attractive price, should Fin Resources raise capital to fund its growth. Keep in mind I haven't considered other factors such as how FIN is expected to perform in the future. I recommend you continue to research Fin Resources to get a more holistic view of the company by looking at:
Historical Performance: What has FIN'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 Fin Resources’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.
