Yahoo Finance Here's Why We're A Bit Worried About International Battery Metals's (CNSX:IBAT) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 International Battery Metals (CNSX:IBAT) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for International Battery Metals
Does International Battery Metals Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When International Battery Metals last reported its balance sheet in July 2019, it had zero debt and cash worth CA$113k. Looking at the last year, the company burnt through CA$1.7m. So it seems to us it had a cash runway of less than two months from July 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is International Battery Metals's Cash Burn Changing Over Time?
International Battery Metals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. We'd venture that the 56% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Admittedly, we're a bit cautious of International Battery Metals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can International Battery Metals Raise More Cash Easily?
While we're comforted by the recent reduction evident from our analysis of International Battery Metals's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
International Battery Metals has a market capitalisation of CA$7.1m and burnt through CA$1.7m last year, which is 24% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is International Battery Metals's Cash Burn A Worry?
On this analysis of International Battery Metals's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the International Battery Metals CEO receives in total remuneration.
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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