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Core Lithium Ltd. (ASX:CXO) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Core Lithium is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Core Lithium 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.
View our latest analysis for Core Lithium
What is cash burn?
With a negative free cash flow of -AU$9.6m, Core Lithium is chipping away at its AU$4.4m cash reserves in order to run its business. The riskiest factor facing investors of Core Lithium is the potential for the company to run out of cash without the ability to raise more money. Unprofitable companies operating in the highly risky metals and mining industry often face this problem, and Core Lithium is no exception. Although these companies can be unprofitable now, they tend to take on project-work, which can payoff sometime in the future.
When will Core Lithium need to raise more cash?
We can measure Core Lithium's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.
Free cash outflows declined by 60% over the past year, which could be an indication of Core Lithium putting the brakes on ramping up high growth. Given the level of cash left in the bank, if Core Lithium maintained its cash burn rate of -AU$9.6m, it could still run out of cash within the next few of months. Even though this is analysis is fairly basic, and Core Lithium still can cut its overhead further, or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the Core Lithium operation is, and when things may have to change.
Next Steps:
Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. Now you know that even if the company was to continue to shrink its cash burn at this rate, it will not be able to sustain its operations given the current level of cash reserves. This may lead to share price pressure in the near term, should Core Lithium be forced to raise capital to fund its growth. Keep in mind I haven't considered other factors such as how CXO is expected to perform in the future. I recommend you continue to research Core Lithium to get a more holistic view of the company by looking at: