Aben Resources Ltd. (CVE:ABN) continues its loss-making streak, announcing negative earnings for its latest financial year ending. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Selling new shares may dilute the value of existing shares on issue, and since Aben Resources is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Aben Resources may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
Currently, Aben Resources has CA$5.0m in cash holdings and producing negative free cash flow of -CA$6.2m. The biggest threat facing Aben Resources investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the high-risk metals and mining industry. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Aben Resources need to raise more cash?
One way to measure the cost to Aben Resources of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).
In Aben Resources’s case, its cash outflows fell by 78% last year, which may signal the company moving towards a more sustainable level of expenses. Given the level of cash left in the bank, if Aben Resources maintained its cash burn rate of -CA$6.2m, it could still run out of cash within the next few of months. Although this is a relatively simplistic calculation, and Aben Resources may continue to reduce its costs further or borrow money instead of raising new equity capital, this analysis still gives us an idea of the company’s timeline and when things will have to start changing, since its current operation is unsustainable.
This analysis isn’t meant to deter you from Aben Resources, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. This may lead to share price pressure in the near term, should Aben Resources be forced to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how ABN is expected to perform in the future. I recommend you continue to research Aben Resources to get a better picture of the company by looking at:
- Historical Performance: What has ABN's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Aben Resources’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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