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 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Superior Lake Resources (ASX:SUP) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business's cash, relative to its cash burn.
Check out our latest analysis for Superior Lake Resources
When Might Superior Lake Resources Run Out Of Money?
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. In December 2019, Superior Lake Resources had AU$762k in cash, and was debt-free. Looking at the last year, the company burnt through AU$7.2m. That means it had a cash runway of under two months as of December 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is Superior Lake Resources's Cash Burn Changing Over Time?
Whilst it's great to see that Superior Lake Resources has already begun generating revenue from operations, last year it only produced AU$24k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. In fact, it ramped its spending strongly over the last year, increasing cash burn by 137%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Superior Lake Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Superior Lake Resources Raise More Cash Easily?
Given its cash burn trajectory, Superior Lake Resources 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).