Canada markets close in 3 hours 33 minutes
  • S&P/TSX

    16,083.48
    -220.60 (-1.35%)
     
  • S&P 500

    3,393.78
    -71.61 (-2.07%)
     
  • DOW

    27,591.66
    -743.91 (-2.63%)
     
  • CAD/USD

    0.7567
    -0.0048 (-0.63%)
     
  • CRUDE OIL

    38.52
    -1.33 (-3.34%)
     
  • BTC-CAD

    17,182.54
    -107.44 (-0.62%)
     
  • CMC Crypto 200

    259.73
    -3.68 (-1.40%)
     
  • GOLD FUTURES

    1,906.80
    +1.60 (+0.08%)
     
  • RUSSELL 2000

    1,603.67
    -36.83 (-2.24%)
     
  • 10-Yr Bond

    0.8040
    -0.0370 (-4.40%)
     
  • NASDAQ

    11,352.10
    -196.18 (-1.70%)
     
  • VOLATILITY

    31.54
    +3.99 (+14.48%)
     
  • FTSE

    5,801.31
    -58.97 (-1.01%)
     
  • NIKKEI 225

    23,494.34
    -22.25 (-0.09%)
     
  • CAD/EUR

    0.6400
    -0.0023 (-0.36%)
     

Here's Why We're Watching Millennial Lithium's (CVE:ML) Cash Burn Situation

Simply Wall St

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Millennial Lithium (CVE:ML) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Millennial Lithium

How Long Is Millennial Lithium's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Millennial Lithium last reported its balance sheet in May 2019, it had zero debt and cash worth CA$30m. In the last year, its cash burn was CA$34m. That means it had a cash runway of around 11 months as of May 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

TSXV:ML Historical Debt, September 27th 2019
TSXV:ML Historical Debt, September 27th 2019

How Is Millennial Lithium's Cash Burn Changing Over Time?

Because Millennial 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 a very significant 58%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Admittedly, we're a bit cautious of Millennial Lithium due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Millennial Lithium Raise Cash?

Given its cash burn trajectory, Millennial Lithium shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 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.

Since it has a market capitalisation of CA$120m, Millennial Lithium's CA$34m in cash burn equates to about 29% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Millennial Lithium's Cash Burn?

We must admit that we don't think Millennial Lithium is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn't too bad, its increasing cash burn does leave us rather nervous. Summing up, we think the Millennial Lithium's cash burn is a risk, based on the factors we mentioned in this article. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Millennial 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 interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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.