Canada markets closed
  • S&P/TSX

    17,909.03
    -49.06 (-0.27%)
     
  • S&P 500

    3,768.25
    -27.29 (-0.72%)
     
  • DOW

    30,814.26
    -177.26 (-0.57%)
     
  • CAD/USD

    0.7853
    -0.0059 (-0.74%)
     
  • CRUDE OIL

    52.04
    -1.53 (-2.86%)
     
  • BTC-CAD

    46,568.49
    -1,289.07 (-2.69%)
     
  • CMC Crypto 200

    701.93
    -33.21 (-4.52%)
     
  • GOLD FUTURES

    1,827.70
    -23.70 (-1.28%)
     
  • RUSSELL 2000

    2,123.20
    -32.15 (-1.49%)
     
  • 10-Yr Bond

    1.0970
    -0.0320 (-2.83%)
     
  • NASDAQ

    12,998.50
    -114.14 (-0.87%)
     
  • VOLATILITY

    24.34
    +1.09 (+4.69%)
     
  • FTSE

    6,735.71
    -66.25 (-0.97%)
     
  • NIKKEI 225

    28,519.18
    -179.08 (-0.62%)
     
  • CAD/EUR

    0.6499
    -0.0005 (-0.08%)
     

Here's Why New Energy Metals (CVE:ENRG) Must Play Its Cards Just Right

Simply Wall St

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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?

So, the natural question for New Energy Metals (CVE:ENRG) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for New Energy Metals

How Long Is New Energy Metals's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In June 2019, New Energy Metals had CA$358k in cash, and was debt-free. In the last year, its cash burn was CA$2.7m. Therefore, from June 2019 it had roughly 2 months of cash runway. It's extremely surprising to us that the company has allowed its cash runway to get that short! Depicted below, you can see how its cash holdings have changed over time.

TSXV:ENRG Historical Debt, October 30th 2019
TSXV:ENRG Historical Debt, October 30th 2019

How Is New Energy Metals's Cash Burn Changing Over Time?

Because New Energy Metals isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Given the length of the cash runway, we'd interpret the 29% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. New Energy Metals makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For New Energy Metals To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for New Energy Metals to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.

New Energy Metals has a market capitalisation of CA$2.1m and burnt through CA$2.7m last year, which is 129% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

So, Should We Worry About New Energy Metals's Cash Burn?

As you can probably tell by now, we're rather concerned about New Energy Metals'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 cash burn reduction 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. 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 New Energy Metals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course New Energy Metals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.

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. Thank you for reading.