Even if a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. 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. That said, unprofitable companies are risky because they can potentially burn through all their money and fall into distress.
Given this risk, we thought we’d see if that was the case Critical elements Lithium (CVE:CRE) Shareholders should be concerned about 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’. First, we will determine cash runway by comparing cash burn to cash reserves.
Check out our latest analysis for Critical Elements Lithium
How long is Critical Elements Lithium’s cash runway?
A cash runway is defined as the time it would take a company to run out of money if it continued to spend at its current rate. When Critical Elements Lithium last reported its balance sheet in May 2023, the company had zero debt and cash of CA$35 million. Looking at the last year, the company burned through CA$11 million. So it had a cash runway of about 3.3 years from May 2023. Notably, however, analysts think Critical Elements Lithium will break even (at free cash flow levels) before then. In that case, it may never reach the end of its cash runway. Below you can see how cash positions have changed over time.
How is Critical Elements Lithium’s cash burn changing over time?
Because Critical Elements Lithium is not currently generating revenue, we consider it an early-stage company. Nevertheless, we can still examine the cash burn trajectory as part of our assessment of the cash burn situation. In fact, over the last year, cash burn is up 26%, suggesting management is increasing investment in future growth, but not too quickly. The company’s real cash runway will therefore be shorter than suggested above if expenses continue to rise. However, it is clear that the crucial factor is whether the company will grow its business in the future. For that reason, it makes sense to look at our analyst forecasts for the company.
How Easily Can Critical Elements Lithium Raise Funds?
While Critical Elements Lithium has solid cash flow, its cash burn trajectory may prompt some shareholders to think ahead about when the company might need to raise more money. Issuing new shares or taking on debt are the most common ways a publicly traded company can raise more money for its operations. Typically, a company will sell new shares on its own to raise money and fuel growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much shareholders would be diluted if the company had to raise enough cash to cover another year’s cash burn.
Critical Elements Lithium has a market capitalization of CA$157 million and lost CA$11 million last year, which is 6.8% of the company’s market value. That’s a low percentage, so we think the company would be able to raise more money to fund growth, with a little dilution, or even just borrow some money.
So should we worry about the cash burn of critical elements of Lithium?
As you can probably tell by now, we’re not too concerned about Critical Elements Lithium’s cash burn. In particular, we think the cash runway stands out as evidence that the company is well aware of its expenses. While the incremental cash burn wasn’t large, the other factors mentioned in this article more than offset the weakness of this metric. Shareholders can take heart from the fact that analysts predict it will reach breakeven. Looking at all the measures in this article together, we are not concerned about the extent to which money is being burned; the company appears to be comfortably meeting its medium-term spending needs. It is important that readers are aware of the risks that could affect the company’s operations, and we have chosen 2 warning signs for critical elements lithium which investors need to know when investing in the stock.
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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.