Yahoo Finance We're Keeping An Eye On Hammer Metals' (ASX:HMX) Cash Burn Rate
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Hammer Metals (ASX:HMX) shareholders should 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Hammer Metals
When Might Hammer Metals Run Out Of Money?
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 Hammer Metals last reported its June 2023 balance sheet in September 2023, it had zero debt and cash worth AU$4.4m. In the last year, its cash burn was AU$5.8m. So it had a cash runway of approximately 9 months from June 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Is Hammer Metals' Cash Burn Changing Over Time?
Although Hammer Metals reported revenue of AU$191k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. It's possible that the 2.1% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Hammer Metals 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 Hammer Metals Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Hammer Metals to raise more cash in the future. 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. 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.
Hammer Metals has a market capitalisation of AU$32m and burnt through AU$5.8m last year, which is 18% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Hammer Metals' Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Hammer Metals' cash burn relative to its market cap was relatively promising. Summing up, we think the Hammer Metals' cash burn is a risk, based on the factors we mentioned in this article. On another note, Hammer Metals has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about.
Of course Hammer Metals 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.
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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.
