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We're Hopeful That Strickland Metals (ASX:STK) Will Use Its Cash Wisely

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, Strickland Metals (ASX:STK) shareholders have done very well over the last year, with the share price soaring by 178%. 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.

Given its strong share price performance, we think it's worthwhile for Strickland Metals shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Strickland Metals

Does Strickland Metals Have A Long 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 Strickland Metals last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth AU$28m. In the last year, its cash burn was AU$13m. So it had a cash runway of about 2.1 years from December 2023. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Strickland Metals' Cash Burn Changing Over Time?

Because Strickland Metals isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Even though it doesn't get us excited, the 30% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of Strickland Metals 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 Easily Can Strickland Metals Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Strickland Metals to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

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Strickland Metals' cash burn of AU$13m is about 8.0% of its AU$166m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Strickland Metals' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Strickland Metals' cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Its cash burn reduction wasn't quite as good, but was still rather encouraging! Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Strickland Metals (2 are a bit concerning!) that you should be aware of before investing here.

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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.