Yahoo Finance We're Not Very Worried About Legacy Iron Ore's (ASX:LCY) Cash Burn Rate
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 this risk, we thought we'd take a look at whether Legacy Iron Ore (ASX:LCY) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Legacy Iron Ore
How Long Is Legacy Iron Ore's Cash Runway?
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. When Legacy Iron Ore last reported its balance sheet in March 2020, it had zero debt and cash worth AU$9.2m. Looking at the last year, the company burnt through AU$1.8m. Therefore, from March 2020 it had 5.2 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
How Is Legacy Iron Ore's Cash Burn Changing Over Time?
Whilst it's great to see that Legacy Iron Ore has already begun generating revenue from operations, last year it only produced AU$86k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With cash burn dropping by 2.8% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Admittedly, we're a bit cautious of Legacy Iron Ore due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Legacy Iron Ore Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Legacy Iron Ore to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Legacy Iron Ore's cash burn of AU$1.8m is about 5.6% of its AU$31m market capitalisation. 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.
So, Should We Worry About Legacy Iron Ore's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Legacy Iron Ore is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn reduction, but even that wasn't too bad! Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Legacy Iron Ore has 4 warning signs (and 2 which are concerning) we think you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
This article by Simply Wall St is general in nature. 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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