Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Aspire Mining (ASX:AKM) shareholders is whether they should be concerned by its rate of 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. Let’s start with an examination of the business’s cash, relative to its cash burn.
Check out our latest analysis for Aspire Mining
When Might Aspire Mining 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. Aspire Mining has such a small amount of debt that we’ll set it aside, and focus on the AU$42m in cash it held at December 2019. In the last year, its cash burn was AU$7.4m. So it had a cash runway of about 5.7 years from December 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
ASX:AKM Historical Debt June 8th 2020
How Is Aspire Mining’s Cash Burn Changing Over Time?
Aspire Mining didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. Admittedly, we’re a bit cautious of Aspire Mining due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Aspire Mining Raise More Cash Easily?
Since its cash burn is increasing (albeit only slightly), Aspire Mining shareholders should still be mindful of the possibility it will require more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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$45m, Aspire Mining’s AU$7.4m in cash burn equates to about 16% of its market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How Risky Is Aspire Mining’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Aspire Mining’s cash burn. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Aspire Mining has 3 warning signs (and 1 which is potentially serious) we think you should know about.