Australia markets open in 6 hours 24 minutes
  • ALL ORDS

    6,678.70
    -81.90 (-1.21%)
     
  • AUD/USD

    0.6406
    -0.0098 (-1.51%)
     
  • ASX 200

    6,474.20
    -80.80 (-1.23%)
     
  • OIL

    79.74
    -1.49 (-1.83%)
     
  • GOLD

    1,668.30
    -0.30 (-0.02%)
     
  • BTC-AUD

    30,003.10
    -340.39 (-1.12%)
     
  • CMC Crypto 200

    443.49
    +0.06 (+0.01%)
     

We're Not Very Worried About Ionic Rare Earths' (ASX:IXR) Cash Burn Rate

·4-min read

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, Ionic Rare Earths (ASX:IXR) has seen its share price rise 200% 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 Ionic Rare Earths 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.

See our latest analysis for Ionic Rare Earths

Does Ionic Rare Earths Have A Long Cash Runway?

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 Ionic Rare Earths last reported its balance sheet in June 2021, it had zero debt and cash worth AU$11m. Importantly, its cash burn was AU$4.5m over the trailing twelve months. Therefore, from June 2021 it had 2.5 years of cash runway. That's decent, giving the company a couple years to develop its business. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. 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 Ionic Rare Earths' Cash Burn Changing Over Time?

Although Ionic Rare Earths reported revenue of AU$214k 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. Its cash burn positively exploded in the last year, up 236%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Ionic Rare Earths 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 Ionic Rare Earths Raise Cash?

Given its cash burn trajectory, Ionic Rare Earths 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. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Ionic Rare Earths' cash burn of AU$4.5m is about 3.4% of its AU$132m 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 Ionic Rare Earths' Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Ionic Rare Earths' cash burn relative to its market cap was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Ionic Rare Earths has 5 warning signs (and 2 which don't sit too well with us) 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 companies insiders are buying, 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.

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