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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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether European Metals Holdings (ASX:EMH) shareholders should be worried about its cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for European Metals Holdings
How Long Is European Metals Holdings' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2023, European Metals Holdings had AU$8.9m in cash, and was debt-free. Looking at the last year, the company burnt through AU$1.8m. That means it had a cash runway of about 4.8 years as of June 2023. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.
How Is European Metals Holdings' Cash Burn Changing Over Time?
While European Metals Holdings did record statutory revenue of AU$1.1m over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 28% over the last year suggests some degree of prudence. 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 European Metals Holdings Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for European Metals Holdings to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).