Yahoo Finance We're Not Very Worried About Equinox Resources' (ASX:EQN) Cash Burn Rate
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. By way of example, Equinox Resources (ASX:EQN) has seen its share price rise 185% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given its strong share price performance, we think it's worthwhile for Equinox Resources shareholders to consider whether its cash burn is concerning. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Equinox Resources
When Might Equinox Resources Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2023, Equinox Resources had cash of AU$4.3m and no debt. Looking at the last year, the company burnt through AU$1.7m. That means it had a cash runway of about 2.4 years as of June 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.
How Is Equinox Resources' Cash Burn Changing Over Time?
While Equinox Resources did record statutory revenue of AU$2.1k over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. As it happens, the company's cash burn reduced by 12% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. Admittedly, we're a bit cautious of Equinox Resources due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For Equinox Resources To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Equinox Resources to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Equinox Resources' cash burn of AU$1.7m is about 4.9% of its AU$35m 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.
How Risky Is Equinox Resources' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Equinox Resources' 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. 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. On another note, Equinox Resources has 4 warning signs (and 2 which are potentially serious) 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)
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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.
