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There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Aspire Mining (ASX:AKM) has seen its share price rise 209% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky Aspire Mining's cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Aspire Mining
How Long Is Aspire Mining's 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 December 2023, Aspire Mining had US$16m in cash, and was debt-free. Looking at the last year, the company burnt through US$3.0m. So it had a cash runway of about 5.2 years from December 2023. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Is Aspire Mining's Cash Burn Changing Over Time?
While Aspire Mining did record statutory revenue of US$56k over the last year, it didn't 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. With cash burn dropping by 12% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Aspire Mining 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.
Can Aspire Mining Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Aspire Mining to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Since it has a market capitalisation of US$100m, Aspire Mining's US$3.0m in cash burn equates to about 3.0% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.