Companies Like Lithium Royalty (TSE:LIRC) Can Afford To Invest In Growth

editorial-team@simplywallst.com (Simply Wall St)

Sun, Nov 24, 2024, 6:45 AM 4 min read

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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, the natural question for Lithium Royalty (TSE:LIRC) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Lithium Royalty

Does Lithium Royalty Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2024, Lithium Royalty had US$7.1m in cash, and was debt-free. Importantly, its cash burn was US$6.3m over the trailing twelve months. Therefore, from September 2024 it had roughly 14 months of cash runway. Notably, however, analysts think that Lithium Royalty will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis — TSX:LIRC Debt to Equity History November 24th 2024

How Well Is Lithium Royalty Growing?

Lithium Royalty managed to reduce its cash burn by 90% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. But it was a bit disconcerting to see operating revenue down 29% in that time. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Lithium Royalty Raise More Cash Easily?

While Lithium Royalty seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Lithium Royalty has a market capitalisation of US$231m and burnt through US$6.3m last year, which is 2.7% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

Is Lithium Royalty's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Lithium Royalty's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. An in-depth examination of risks revealed 1 warning sign for Lithium Royalty that readers should think about before committing capital to this stock.

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)

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.