As the CA$34m market cap American Manganese Inc (CVE:AMY) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? This is because new equity from additional capital raising can thin out the value of current shareholders’ stake in the company. Given that American Manganese is spending more money than it earns, it will need to fund its expenses via external sources of capital. American Manganese may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
With a negative free cash flow of -CA$2.6m, American Manganese is chipping away at its CA$793k cash reserves in order to run its business. The biggest threat facing American Manganese investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the high-risk metals and mining industry. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will American Manganese need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much American Manganese has to spend each year in order to keep its business running.
Free cash outflows declined by 46% over the past year, which could be an indication of American Manganese putting the brakes on ramping up high growth. Given the level of cash left in the bank, if American Manganese maintained its cash burn rate of -CA$2.6m, it could still run out of cash within the next few of months. Even though this is analysis is fairly basic, and American Manganese still can cut its overhead further, or open a new line of credit instead of issuing new shares, this analysis still helps us understand how sustainable the American Manganese operation is, and when things may have to change.
The risks involved in investing in loss-making American Manganese means you should think twice before diving into the stock. However, this should not prevent you from further researching it as an investment potential. The outcome of my analysis suggests that even if the company maintains this rate of cash burn growth, it will run out of cash within the year. This may lead to share price pressure in the near term, should American Manganese be forced to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how AMY is expected to perform in the future. I recommend you continue to research American Manganese to get a more holistic view of the company by looking at:
- Historical Performance: What has AMY's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on American Manganese’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 April 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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