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Companies Like Metallica Minerals (ASX:MLM) Can Be Considered Quite Risky

Simply Wall St

Just because a business does not make any money, does not mean that the stock will go down. 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.

So, the natural question for Metallica Minerals (ASX:MLM) 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). Let's start with an examination of the business's cash, relative to its cash burn.

Check out our latest analysis for Metallica Minerals

Does Metallica Minerals Have A Long 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 Metallica Minerals last reported its balance sheet in June 2019, it had zero debt and cash worth AU$3.1m. Importantly, its cash burn was AU$3.5m over the trailing twelve months. That means it had a cash runway of around 11 months as of June 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

ASX:MLM Historical Debt, October 1st 2019

How Is Metallica Minerals's Cash Burn Changing Over Time?

Whilst it's great to see that Metallica Minerals has already begun generating revenue from operations, last year it only produced AU$99k, 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. Over the last year its cash burn actually increased by 22%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of Metallica Minerals 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 Easily Can Metallica Minerals Raise Cash?

Given its cash burn trajectory, Metallica Minerals shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 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).

Since it has a market capitalisation of AU$4.2m, Metallica Minerals's AU$3.5m in cash burn equates to about 83% of its market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

How Risky Is Metallica Minerals's Cash Burn Situation?

Metallica Minerals is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its increasing cash burn acceptable, we can't ignore the fact that we consider its cash burn relative to its market cap to be downright troublesome. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. Notably, our data indicates that Metallica Minerals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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.

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.

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. Thank you for reading.