We can easily understand why investors are attracted to unprofitable companies. For example, biotechnology and mining exploration companies often lose money for years before succeeding with a new treatment or mineral discovery. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
So should Leigh Creek Energy (ASX: LCK) Are shareholders worried about its cash burn? In this report, we will consider the company’s annual negative free cash flow, which we will now refer to as “cash burn”. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
Check out our latest analysis for Leigh Creek Energy
When could Leigh Creek Energy run out of money?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. As of June 2021, Leigh Creek Energy had A$23 million in cash and debt so minimal that we can ignore it for the purposes of this analysis. Looking at last year, the company spent A$8.3 million. That means it had a cash trail of around 2.8 years in June 2021. Arguably, that’s a conservative and reasonable runway length to have. You can see how his cash balance has changed over time in the image below.
How is Leigh Creek Energy’s cash burn changing over time?
Since Leigh Creek Energy is not currently generating revenue, we consider it to be an early-stage business. Nonetheless, we can still look at its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn down 5.6%, it appears management believes the company is spending enough to move its business plans forward at an appropriate pace. Admittedly, we are a bit cautious of Leigh Creek Energy due to its lack of meaningful operating revenue. We prefer most stocks on this list of stocks that analysts expect to see growth.
Can Leigh Creek Energy raise more money easily?
Although Leigh Creek Energy is showing a solid reduction in its cash burn, it is still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital either through debt or equity. Many companies end up issuing new shares to fund their future growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
Leigh Creek Energy has a market capitalization of A$134 million and spent A$8.3 million last year, or 6.2% of the company’s market value. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
Is Leigh Creek Energy’s cash burn a concern?
As you can probably tell by now, we’re not too worried about Leigh Creek Energy’s cash burn. In particular, we think its cash trail stands out as proof that the company is on top of spending. Its downside is its reduced cash burn, but even that wasn’t so bad! Looking at all the metrics in this article, together, we’re not worried about its cash burn rate; the company appears to be well above its medium-term spending needs. On another note, Leigh Creek Energy has 5 warning signs (and 2 that are a bit obnoxious) that we think you should know about.
If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.