Yahoo Finance We're Not Worried About Emmerson Resources' (ASX:ERM) Cash Burn
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 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 Emmerson Resources (ASX:ERM) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Emmerson Resources
How Long Is Emmerson Resources' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Emmerson Resources last reported its balance sheet in December 2020, it had zero debt and cash worth AU$5.5m. In the last year, its cash burn was AU$2.0m. Therefore, from December 2020 it had 2.7 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is Emmerson Resources' Cash Burn Changing Over Time?
In the last year, Emmerson Resources did book revenue of AU$105k, but its revenue from operations was less, at just AU$33k. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 37% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Emmerson Resources due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Emmerson Resources To Raise More Cash For Growth?
While Emmerson Resources is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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).
Emmerson Resources has a market capitalisation of AU$38m and burnt through AU$2.0m last year, which is 5.3% of the company's 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.
Is Emmerson Resources' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Emmerson Resources' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Emmerson Resources (of which 1 shouldn't be ignored!) 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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