Companies Like Prospect Resources (ASX:PSC) Are In A Position To Invest In Growth
We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Prospect Resources (ASX:PSC) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Prospect Resources
How Long Is Prospect Resources' Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2023, Prospect Resources had cash of AU$26m and no debt. In the last year, its cash burn was AU$7.2m. That means it had a cash runway of about 3.7 years as of June 2023. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Is Prospect Resources' Cash Burn Changing Over Time?
Because Prospect Resources isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 31% over the last year suggests some degree of prudence. Prospect Resources makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Prospect Resources Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Prospect Resources to raise more 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. Many companies end up issuing new shares to fund future 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$39m, Prospect Resources' AU$7.2m in cash burn equates to about 18% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Prospect Resources' Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Prospect Resources' cash burn. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn relative to its market cap, but even that wasn't too bad! Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Taking an in-depth view of risks, we've identified 3 warning signs for Prospect Resources that you should be aware of before investing.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 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.
