Yahoo Finance Companies Like European Electric Metals (CVE:EVX) Can Be Considered Quite Risky
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether European Electric Metals (CVE:EVX) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.
Check out our latest analysis for European Electric Metals
Does European Electric Metals Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When European Electric Metals last reported its balance sheet in July 2019, it had zero debt and cash worth CA$2.4k. In the last year, its cash burn was CA$535k. That means it had a cash runway of under two months as of July 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.
How Is European Electric Metals's Cash Burn Changing Over Time?
Because European Electric Metals 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. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 87% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. European Electric Metals 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 Hard Would It Be For European Electric Metals To Raise More Cash For Growth?
There's no doubt European Electric Metals's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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.
European Electric Metals has a market capitalisation of CA$431k and burnt through CA$535k last year, which is 124% 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 European Electric Metals's Cash Burn Situation?
There are no prizes for guessing that we think European Electric Metals's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. But the silver lining was its cash burn reduction, which was encouraging. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. Notably, our data indicates that European Electric Metals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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)
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