Yahoo Finance Can American Lithium (CVE:LI) Fund Its Growth Plans?
We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should American Lithium (CVE:LI) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for American Lithium
Does American Lithium Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When American Lithium last reported its balance sheet in August 2019, it had zero debt and cash worth CA$20k. Importantly, its cash burn was CA$6.1m over the trailing twelve months. That means it had a cash runway of under two months as of August 2019. To be frank we are alarmed by how short that cash runway is! You can see how its cash balance has changed over time in the image below.
How Is American Lithium's Cash Burn Changing Over Time?
American Lithium 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. During the last twelve months, its cash burn actually ramped up 60%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. American Lithium makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can American Lithium Raise Cash?
Since its cash burn is moving in the wrong direction, American Lithium shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
American Lithium has a market capitalisation of CA$7.5m and burnt through CA$6.1m last year, which is 81% of the company's market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
How Risky Is American Lithium's Cash Burn Situation?
As you can probably tell by now, we're rather concerned about American Lithium's cash burn. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. And although we accept its increasing cash burn wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. Its cash burn burn situation feels about as relaxing as riding your bicycle home in the rain without so much as a jumper. It's likely to need more cash in the near term; and that could well hurt returns. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that American Lithium insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
