We can readily understand why investors are attracted to unprofitable companies. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Arizona Metals (TSE:AMC) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’ cash, relative to its cash burn.
Check out our latest analysis for Arizona Metals
How Long Is Arizona Metals’ Cash Runway?
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. When Arizona Metals last reported its balance sheet in September 2022, it had zero debt and cash worth CA$57m. Importantly, its cash burn was CA$22m over the trailing twelve months. So it had a cash runway of about 2.6 years from September 2022. That’s decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Is Arizona Metals’ Cash Burn Changing Over Time?
Because Arizona Metals isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 56%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can Arizona Metals Raise Cash?
While Arizona Metals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Arizona Metals has a market capitalisation of CA$505m and burnt through CA$22m last year, which is 4.3% of the company’s 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.
Is Arizona Metals’ Cash Burn A Worry?
It may already be apparent to you that we’re relatively comfortable with the way Arizona Metals is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Arizona Metals has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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