We can easily understand why investors are attracted to unprofitable companies. For example, while software-as-a-service company Salesforce.com has lost money for years while growing recurring revenue, you would have done very well if you had owned shares since 2005. But even though the successes are well known, investors should not ignore the many unprofitable companies that simply burn through all their cash and collapse.
So the natural question for Lithium Royalty (TSE:LIRC) shareholders are wondering whether they should be concerned about the pace of cash burn. In this report, we look at the company’s annual negative free cash flow and henceforth refer to it as its ‘cash burn’. We start by comparing cash burn to cash reserves to calculate cash runway.
Check out our latest analysis for Lithium Royalty
A company’s cash runway is the amount of time it takes to burn through its cash reserves at its current cash burn rate. As of September 2024, Lithium Royalty had $7.1 million in cash and was debt-free. Importantly, its cash burn over the trailing twelve months was $6.3m. Therefore, it had about 14 months of cash runway as of September 2024. However, analysts specifically believe that Lithium Royalty will break even (at the free cash flow level) before then. If that happens, the length of the current cash runway would become a moot point. The image below shows how the cash balance has changed in recent years.
Lithium Royalty has managed to reduce its cash burn by 90% over the last twelve months, which is extremely promising when it comes to cash needs. But it was a bit troubling to see operating revenues decline 29% during that time. Considering the above factors, the company isn’t doing too badly when it comes to assessing how it’s changing over time. While the past is always worth studying, it is the future that matters most. For that reason, it makes sense to look at our analyst forecasts for the company.
While Lithium Royalty seems to be in a pretty good position, it’s still worth considering how easily it could raise more money, even just to fuel faster growth. Generally, a publicly traded company can raise new cash by issuing stock or taking on debt. Typically, a company will sell new shares on its own to raise money and fuel growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company going for another year (at the same burn rate).
