We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Indiana Resources (ASX:IDA) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
When Might Indiana Resources Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2022, Indiana Resources had cash of AU$2.4m and no debt. Looking at the last year, the company burnt through AU$4.5m. That means it had a cash runway of around 6 months as of June 2022. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.
How Is Indiana Resources' Cash Burn Changing Over Time?
While Indiana Resources did record statutory revenue of AU$2.0k over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. During the last twelve months, its cash burn actually ramped up 88%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Admittedly, we're a bit cautious of Indiana Resources due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Indiana Resources To Raise More Cash For Growth?
Since its cash burn is moving in the wrong direction, Indiana Resources shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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).
Since it has a market capitalisation of AU$29m, Indiana Resources' AU$4.5m in cash burn equates to about 15% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Indiana Resources' Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Indiana Resources' cash burn relative to its market cap was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, Indiana Resources has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.
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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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