There’s no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Critical Elements Lithium (CVE:CRE) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Critical Elements Lithium
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at May 2023, Critical Elements Lithium had cash of CA$35m and no debt. Looking at the last year, the company burnt through CA$11m. Therefore, from May 2023 it had 3.3 years of cash runway. There’s no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.
Because Critical Elements Lithium isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 26%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
While Critical Elements Lithium does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.
Since it has a market capitalisation of CA$322m, Critical Elements Lithium’s CA$11m in cash burn equates to about 3.3% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
It may already be apparent to you that we’re relatively comfortable with the way Critical Elements Lithium is burning through its cash. 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. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking a deeper dive, we’ve spotted 3 warning signs for Critical Elements Lithium you should be aware of, and 2 of them are a bit concerning.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
Stock info –
SP: 1.4500 CAD