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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Liberty One Lithium (CVE:LBY) 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.
How Long Is Liberty One Lithium's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Liberty One Lithium last reported its balance sheet in September 2019, it had zero debt and cash worth CA$7.5m. Looking at the last year, the company burnt through CA$1.8m. Therefore, from September 2019 it had 4.2 years of cash runway. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Is Liberty One Lithium's Cash Burn Changing Over Time?
Because Liberty One Lithium 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. Even though it doesn't get us excited, the 47% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of Liberty One Lithium due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Liberty One Lithium Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Liberty One Lithium 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. 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.
Liberty One Lithium's cash burn of CA$1.8m is about 58% of its CA$3.1m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
So, Should We Worry About Liberty One Lithium's Cash Burn?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Liberty One Lithium's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Liberty One Lithium's situation. On another note, Liberty One Lithium has 4 warning signs (and 2 which don't sit too well with us) we think you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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