Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, although the software as a service company Salesforce.com lost money for years as it increased its recurring revenue, if you had owned stocks since 2005, you would have done very well. Still, only an idiot would ignore the risk that a loss-making company would burn up its cash too quickly.
In view of this risk, we thought to examine whether Energetic metals (ASX: EME) shareholders should be concerned about its consumption of cash. For the purposes of this article, cash consumption is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. Let’s start with a review of the company’s cash flow, relative to its cash consumption.
Check out our latest review for Energy Metals
Do Energy Metals Have a Long Cash Track?
A cash flow trail is defined as the time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. When Energy Metals last published its balance sheet in June 2021, it had no debt and cash worth AU $ 16 million. Importantly, his cash consumption was AU $ 1.0 million in the past twelve months. This means that he had a very many years cash trail as of June 2021. While this is only a measure of his cash consumption situation, it certainly gives us the impression that the holders do not. ‘have nothing to fear. The image below shows how his cash balance has evolved over the past few years.
How does Energy Metals’ silver consumption change over time?
Energy Metals has not recorded any sales in the past year, indicating that it is a start-up company that continues to grow its business. Nonetheless, we can still examine its cash consumption trajectory as part of our assessment of its cash consumption situation. With a cash consumption rate up 46% over the past year, it looks like the company is increasing its investment in the business over time. This is not necessarily a bad thing, but investors should be aware that it will shorten the liquidity trail. Certainly, we are a little cautious of Energy Metals due to its lack of significant operating income. So we generally prefer stocks from this list of stocks that analysts expect to grow.
How easily can Energy Metals raise funds?
Given its cash-consuming trajectory, Energy Metals shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Typically, a company itself will sell new stocks to raise funds and drive growth. We can compare a company’s cash consumption to its market capitalization to get an idea of how many new shares a company would need to issue to fund its one-year operations.
Energy Metals’ cash consumption of AU $ 1.0 million represents approximately 1.8% of its market capitalization of AU $ 57 million. So he could almost certainly borrow a little to finance another year’s growth, or he could easily raise cash by issuing a few shares.
So, should we be worried about Energy Metals consuming silver?
As you can probably see by now, we’re not too worried about Energy Metals consuming cash. For example, we think his cash flow trail suggests the business is on the right track. Although its growing consumption of cash has not been significant, the other factors mentioned in this article more than make up for the weakness of this measure. After taking into account the various metrics mentioned in this report, we are quite comfortable with the way the company is spending its money, as it appears to be on track to meet its medium term needs. By diving deeper, we spotted 4 warning signs for Energy Metals you should be aware of, and 2 of them are a bit of a concern.
Sure Energy Metals may not be the best stock to buy. So you might want to see this free a set of companies offering a high return on equity, or that list of stocks that insiders buy.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.