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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should IEMR Resources (CVE:IRI) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is IEMR Resources's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at January 2020, IEMR Resources had cash of CA$1.1m and no debt. Looking at the last year, the company burnt through CA$124k. So it had a cash runway of about 9.0 years from January 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
Can IEMR Resources Raise More Cash Easily?
Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of CA$948k, IEMR Resources's CA$124k in cash burn equates to about 13% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is IEMR Resources's Cash Burn Situation?
Given it's an early stage company, we don't have a lot of data with which to judge IEMR Resources's cash burn. Having said that, we can say that its cash runway was a real positive. In conclusion, we don't see why investors should be concerned with its cash burn, at least for some time. Taking a deeper dive, we've spotted 3 warning signs for IEMR Resources you should be aware of, and 2 of them are potentially serious.
Of course IEMR Resources 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.
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