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We can readily understand why investors are attracted to unprofitable companies. Indeed, Helix Resources (ASX:HLX) stock is up 144% in the last year, providing strong gains for shareholders. 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 Helix Resources shareholders to consider whether its cash burn is concerning. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Helix Resources Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Helix Resources last reported its balance sheet in June 2021, it had zero debt and cash worth AU$5.4m. Importantly, its cash burn was AU$1.1m over the trailing twelve months. Therefore, from June 2021 it had 4.9 years of cash runway. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Is Helix Resources' Cash Burn Changing Over Time?
Whilst it's great to see that Helix Resources has already begun generating revenue from operations, last year it only produced AU$201k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. As it happens, the company's cash burn reduced by 19% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Helix Resources makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Helix Resources Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Helix Resources 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. 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.
Since it has a market capitalisation of AU$28m, Helix Resources' AU$1.1m in cash burn equates to about 4.0% of its 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 Helix Resources' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Helix Resources' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Helix Resources has 4 warning signs (and 2 which make us uncomfortable) 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)
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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