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Alderan Resources (ASX:AL8) Will Have To Spend Its Cash Wisely

Simply Wall St

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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Alderan Resources (ASX:AL8) shareholders is whether they should be concerned by its rate of cash burn. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Alderan Resources

How Long Is Alderan Resources'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 Alderan Resources last reported its balance sheet in December 2019, it had zero debt and cash worth AU$229k. In the last year, its cash burn was AU$2.0m. Therefore, from December 2019 it seems to us it had less than two months of cash runway. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.

ASX:AL8 Historical Debt, March 14th 2020

How Is Alderan Resources's Cash Burn Changing Over Time?

Alderan Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. We'd venture that the 76% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Admittedly, we're a bit cautious of Alderan 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.

Can Alderan Resources Raise More Cash Easily?

There's no doubt Alderan Resources's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further 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 to fund 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.

Alderan Resources has a market capitalisation of AU$2.9m and burnt through AU$2.0m last year, which is 68% of the company's market value. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.

So, Should We Worry About Alderan Resources's Cash Burn?

There are no prizes for guessing that we think Alderan Resources's cash burn is a bit of a worry. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. Taking a deeper dive, we've spotted 7 warning signs for Alderan Resources you should be aware of, and 4 of them can't be ignored.

Of course Alderan Resources may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.