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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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Iris Energy (NASDAQ:IREN) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
View our latest analysis for Iris Energy
Does Iris Energy Have A Long 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. When Iris Energy last reported its balance sheet in June 2023, it had zero debt and cash worth US$69m. Importantly, its cash burn was US$110m over the trailing twelve months. So it had a cash runway of approximately 8 months from June 2023. Notably, analysts forecast that Iris Energy will break even (at a free cash flow level) in about 19 months. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Iris Energy Growing?
Happily, Iris Energy is travelling in the right direction when it comes to its cash burn, which is down 60% over the last year. And revenue is up 28% in that same period; also a good sign. It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Iris Energy Raise Cash?
Even though it seems like Iris Energy is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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 US$336m, Iris Energy's US$110m in cash burn equates to about 33% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.