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We're A Little Worried About Mali Lithium's (ASX:MLL) Cash Burn Rate

Simply Wall St

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Mali Lithium (ASX:MLL) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Mali Lithium

When Might Mali Lithium Run Out Of Money?

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. When Mali Lithium last reported its balance sheet in June 2019, it had zero debt and cash worth AU$2.6m. Looking at the last year, the company burnt through AU$7.1m. That means it had a cash runway of around 4 months as of June 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.

ASX:MLL Historical Debt, January 21st 2020

How Is Mali Lithium's Cash Burn Changing Over Time?

Because Mali Lithium isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Given the length of the cash runway, we'd interpret the 39% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Mali Lithium 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 Mali Lithium Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Mali Lithium to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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$27m, Mali Lithium's AU$7.1m in cash burn equates to about 27% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Mali Lithium's Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Mali Lithium's cash burn reduction was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Notably, our data indicates that Mali Lithium insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.