Here's Why We're A Bit Worried About Lithium Americas' (TSE:LAC) Cash Burn Situation

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

Sun, Mar 17, 2024, 7:40 AM 4 min read

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Lithium Americas ( TSE:LAC ) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Lithium Americas

When Might Lithium Americas Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Lithium Americas last reported its December 2023 balance sheet in March 2024, it had zero debt and cash worth US$196m. Looking at the last year, the company burnt through US$228m. So it had a cash runway of approximately 10 months from December 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis — TSX:LAC Debt to Equity History March 17th 2024

How Is Lithium Americas' Cash Burn Changing Over Time?

Because Lithium Americas isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Remarkably, it actually increased its cash burn by 295% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company .

Can Lithium Americas Raise More Cash Easily?

Given its cash burn trajectory, Lithium Americas shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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).

Lithium Americas has a market capitalisation of US$1.0b and burnt through US$228m last year, which is 22% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Disclaimer: In assessing Lithium Americas' financial situation, it's crucial to consider the recent development of the US government lending $2.26 billion to the company. This significant injection of funds could potentially extend the company's cash runway significantly and alleviate the immediate concerns regarding its cash burn problem. While the details surrounding this loan and its impact on the company's financial stability are essential, it's clear that without this external support, the short cash runway would have posed a challenge for Lithium Americas. Therefore, this recent funding should be factored into any analysis of the company's financial health and its ability to address its cash burn issue effectively.

How Risky Is Lithium Americas' Cash Burn Situation?

We must admit that we don't think Lithium Americas is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its increasing cash burn to be downright troublesome. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Lithium Americas (of which 2 are a bit unpleasant!) you should know about.

Of course Lithium Americas 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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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.