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. By way of example, Ionic Rare Earths (ASX:IXR) has seen its share price rise 200% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Ionic Rare Earths shareholders to consider whether its cash burn is concerning. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Ionic Rare Earths

Does Ionic Rare Earths Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Ionic Rare Earths last reported its balance sheet in June 2021, it had zero debt and cash worth AU$11m. Importantly, its cash burn was AU$4.5m over the trailing twelve months. Therefore, from June 2021 it had 2.5 years of cash runway. That's decent, giving the company a couple years to develop its business. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. You can see how its cash balance has changed over time in the image below.

How Is Ionic Rare Earths' Cash Burn Changing Over Time?

Although Ionic Rare Earths reported revenue of AU$214k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Its cash burn positively exploded in the last year, up 236%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Ionic Rare Earths makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Ionic Rare Earths Raise Cash?

Given its cash burn trajectory, Ionic Rare Earths shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.