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How Long Will Loss-Making Elementos Limited (ASX:ELT) Survive?

Trailing twelve-month data shows us that Elementos Limited's (ASX:ELT) earnings loss has accumulated to -AU$1.9m. Although some investors expected this, their belief in the path to profitability for Elementos may be wavering. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. 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. Elementos may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.

Check out our latest analysis for Elementos

What is cash burn?

With a negative free cash flow of -AU$1.8m, Elementos is chipping away at its AU$401k cash reserves in order to run its business. The biggest threat facing Elementos investors is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the highly risky metals and mining industry often face this problem, and Elementos is no exception. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.

ASX:ELT Income Statement, September 20th 2019
ASX:ELT Income Statement, September 20th 2019

When will Elementos need to raise more cash?

When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Elementos has to spend each year in order to keep its business running.

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In Elementos’s case, its cash outflows fell by 18% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Elementos’s operations and the company may need to raise more capital within the year. Even though this is analysis is fairly basic, and Elementos still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the Elementos operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from Elementos, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that even if the company maintains this rate of cash burn growth, it will run out of cash within the year. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. This is only a rough assessment of financial health, and ELT likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research Elementos to get a more holistic view of the company by looking at:

  1. Historical Performance: What has ELT'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.

  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Elementos’s board and the CEO’s back ground.

  3. 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 30 June 2019. 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.