Yahoo Finance NextSource Materials (TSE:NEXT) Is In A Good Position To Deliver On Growth Plans
We can readily understand why investors are attracted to unprofitable companies. For example, NextSource Materials (TSE:NEXT) shareholders have done very well over the last year, with the share price soaring by 538%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for NextSource Materials shareholders to consider whether its cash burn is concerning. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for NextSource Materials
How Long Is NextSource Materials' Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When NextSource Materials last reported its balance sheet in September 2021, it had zero debt and cash worth US$19m. In the last year, its cash burn was US$9.0m. That means it had a cash runway of about 2.1 years as of September 2021. Importantly, the one analyst we see covering the stock thinks that NextSource Materials will reach cashflow breakeven in 4 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.
How Is NextSource Materials' Cash Burn Changing Over Time?
Because NextSource Materials isn't currently generating revenue, we consider it an early-stage 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. Its cash burn positively exploded in the last year, up 452%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can NextSource Materials Raise More Cash Easily?
Given its cash burn trajectory, NextSource Materials shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
NextSource Materials has a market capitalisation of US$276m and burnt through US$9.0m last year, which is 3.3% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is NextSource Materials' Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought NextSource Materials' cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. 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 NextSource Materials' situation. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for NextSource Materials (5 are a bit concerning!) that you should be aware of before investing here.
Of course NextSource Materials may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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