As the AU$21m market cap AIC Mines Limited (ASX:A1M) released another year of negative earnings, investors may be on edge waiting for breakeven. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Today I’ve examined AIC Mines’s financial data from its most recent earnings update, to roughly assess when the company may need to raise new capital.
What is cash burn?
Currently, AIC Mines has AU$7.4m in cash holdings and producing negative free cash flow of -AU$4.0m. The biggest threat facing AIC Mines investors is the company going out of business when it runs out of money and cannot raise any more capital. Unprofitable companies operating in the highly risky metals and mining industry often face this problem, and AIC Mines is no exception. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will AIC Mines 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 AIC Mines has to spend each year in order to keep its business running.
Free cash outflows declined by 31% over the past year, which could be an indication of AIC Mines putting the brakes on ramping up high growth. However, even if AIC Mines maintains its cash burn at the current level of -AU$4.0m, then given the current level of cash in the bank, AIC Mines will still have to raise capital again in 1.9 years. Even though this is analysis is fairly basic, and AIC Mines still can cut its overhead further, or borrow money instead of raising new equity capital, the outcome of this analysis still helps us understand how sustainable the AIC Mines operation is, and when things may have to change.
This analysis isn’t meant to deter you from AIC Mines, but rather, to help you better understand the risks involved investing in loss-making companies. Now you know that even if the company was to continue to shrink its cash burn at its current rate, it will not be able to sustain its operations given the current level of cash reserves. The potential equity raising resulting from this means you might get a better deal on the share price if the company the company raises capital again. Keep in mind I haven't considered other factors such as how A1M is expected to perform in the future. You should continue to research AIC Mines to get a more holistic view of the company by looking at:
- Historical Performance: What has A1M'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 AIC Mines’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 31 December 2018. 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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