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Azarga Uranium Corp. (TSE:AZZ) continues its loss-making streak, announcing negative earnings for its latest financial year ending. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Selling new shares may dilute the value of existing shares on issue, and since Azarga Uranium is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Today I’ve examined Azarga Uranium’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, Azarga Uranium has US$1.3m in cash holdings and producing negative free cash flow of -US$3.8m. The riskiest factor facing investors of Azarga Uranium is the potential for the company to run out of cash without the ability to raise more money. Not surprisingly, it is more common to find unprofitable companies in the high-risk energy industry. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Azarga Uranium need to raise more cash?
We can measure Azarga Uranium's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
In Azarga Uranium’s case, its cash outflows fell by 12% last year, which may signal the company moving towards a more sustainable level of expenses. However, the current level of cash is not enough to sustain Azarga Uranium’s operations and the company may need to raise more capital within the year. Although this is a relatively simplistic calculation, and Azarga Uranium may continue to reduce its costs further or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Azarga Uranium operation is, and when things may have to change.
This analysis isn’t meant to deter you from Azarga Uranium, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. This may lead to share price pressure in the near term, should Azarga Uranium be forced to raise capital to fund its growth. I admit this is a fairly basic analysis for AZZ's financial health. Other important fundamentals need to be considered as well. I suggest you continue to research Azarga Uranium to get a more holistic view of the company by looking at:
Future Outlook: What are well-informed industry analysts predicting for AZZ’s future growth? Take a look at our free research report of analyst consensus for AZZ’s outlook.
Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Azarga Uranium’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 30 June 2019. 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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