Encounter Resources (ASX:ENR) Is In A Good Position To Deliver On Growth Plans
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. Indeed, Encounter Resources (ASX:ENR) stock is up 115% in the last year, providing strong gains for shareholders. 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.
Given its strong share price performance, we think it's worthwhile for Encounter Resources shareholders to consider whether its cash burn is concerning. 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Encounter Resources
How Long Is Encounter Resources' 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. In June 2023, Encounter Resources had AU$12m in cash, and was debt-free. Importantly, its cash burn was AU$4.3m over the trailing twelve months. That means it had a cash runway of about 2.8 years as of June 2023. Arguably, that's a prudent and sensible length of runway to have. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. Depicted below, you can see how its cash holdings have changed over time.
How Is Encounter Resources' Cash Burn Changing Over Time?
Although Encounter Resources reported revenue of AU$135 last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Over the last year its cash burn actually increased by 13%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Encounter Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Encounter Resources Raise More Cash Easily?
Given its cash burn trajectory, Encounter Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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$113m, Encounter Resources' AU$4.3m in cash burn equates to about 3.8% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Encounter Resources' Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Encounter Resources is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Encounter Resources (of which 1 can't be ignored!) you should know about.
Of course Encounter 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.
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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.
