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There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Energy Fuels (TSE:EFR) stock is up 212% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given its strong share price performance, we think it's worthwhile for Energy Fuels shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.
Does Energy Fuels Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2020, Energy Fuels had cash of US$22m and no debt. Importantly, its cash burn was US$33m over the trailing twelve months. That means it had a cash runway of around 8 months as of December 2020. Importantly, analysts think that Energy Fuels will reach cashflow breakeven in around 15 months. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Energy Fuels Growing?
It was fairly positive to see that Energy Fuels reduced its cash burn by 26% during the last year. But it makes us pessimistic to see that operating revenue slid 72% in that time. Taken together, we think these growth metrics are a little worrying. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Energy Fuels Raise More Cash Easily?
Given Energy Fuels' revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Energy Fuels has a market capitalisation of US$882m and burnt through US$33m last year, which is 3.7% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Energy Fuels' Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Energy Fuels' cash burn relative to its market cap was relatively promising. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 5 warning signs for Energy Fuels that potential shareholders should take into account before putting money into a stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
This article by Simply Wall St is general in nature. 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.
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