We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Arrow Minerals (ASX:AMD) 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Arrow Minerals Have A Long 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 December 2019, Arrow Minerals had cash of AU$982k and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was AU$4.3m. That means it had a cash runway of around 3 months as of December 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. The image below shows how its cash balance has been changing over the last few years.
How Is Arrow Minerals's Cash Burn Changing Over Time?
While Arrow Minerals did record statutory revenue of AU$49k over the last year, it didn't 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. As it happens, the company's cash burn reduced by 2.3% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Arrow Minerals 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 Arrow Minerals Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Arrow Minerals to raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Arrow Minerals has a market capitalisation of AU$6.4m and burnt through AU$4.3m last year, which is 67% of the company's market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Arrow Minerals's Cash Burn A Worry?
There are no prizes for guessing that we think Arrow Minerals's cash burn is a bit of a worry. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. And although we accept its cash burn reduction wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. On another note, Arrow Minerals has 7 warning signs (and 4 which make us uncomfortable) we think you should know about.
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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