Yahoo Finance Here's Why We're Not Too Worried About Eclipse Metals' (ASX:EPM) 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, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Eclipse Metals (ASX:EPM) 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.
Check out our latest analysis for Eclipse Metals
When Might Eclipse Metals 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. When Eclipse Metals last reported its balance sheet in December 2021, it had zero debt and cash worth AU$1.5m. Importantly, its cash burn was AU$1.1m over the trailing twelve months. That means it had a cash runway of around 16 months as of December 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.
How Is Eclipse Metals' Cash Burn Changing Over Time?
Whilst it's great to see that Eclipse Metals has already begun generating revenue from operations, last year it only produced AU$11k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. During the last twelve months, its cash burn actually ramped up 77%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Eclipse Metals makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For Eclipse Metals To Raise More Cash For Growth?
Given its cash burn trajectory, Eclipse Metals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 and 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.
Since it has a market capitalisation of AU$40m, Eclipse Metals' AU$1.1m in cash burn equates to about 2.8% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Eclipse Metals' Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Eclipse Metals' cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Eclipse Metals' situation. Taking a deeper dive, we've spotted 2 warning signs for Eclipse Metals you should be aware of, and 1 of them can't be ignored.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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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