We can easily understand why investors are attracted to unprofitable companies. For example, Lake resources (ASX:LKE) Shareholders did very well last year as the stock price soared 552%. But while the success stories are well known, investors shouldn’t ignore the many, many unprofitable companies that simply burn all their money and crash.
Given its strong share price performance, we think it’s worth asking Lake Resources shareholders whether its cash burn is a concern. 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. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
Check out our latest analysis for Lake Resources
How long is the Lake Resources cash trail?
A company’s cash track is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of December 2021, Lake Resources had cash of A$71 million and no debt. Looking at last year, the company burned A$12 million. That means it had a cash trail of around 6.1 years in December 2021. Importantly, however, analysts believe Lake Resources will break even before then. If that happens, then the length of his cash trail today would become a moot point. The image below shows how his cash balance has changed over the past few years.
How is Lake Resources’ cash burn changing over time?
Lake Resources has not recorded any revenue for the past year, indicating that it is an early-stage company that is still expanding its business. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. Soaring cash burn of 171% year over year is certainly testing our nerves. This type of increase in spending is undoubtedly intended to generate attractive long-term returns. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
How easily can Lake Resources raise funds?
Given its cash burn trajectory, Lake Resources shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. In general, a listed company can raise new funds by issuing shares or by going into debt. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their growth. By looking at a company’s cash burn relative to its market capitalization, we gain insight into how much of a shareholder base would be diluted if the company needed to raise enough cash to cover a company’s cash burn. another year.
Lake Resources has a market capitalization of A$1.9 billion and burned A$12 million last year, or 0.6% of the company’s market value. So he could almost certainly borrow a little to fund another year’s growth, or he could easily raise cash by issuing a few shares.
So should we be worried about Lake Resources’ cash burn?
It may already be obvious to you that we are relatively comfortable with how Lake Resources spends its cash. For example, we think its cash trail suggests the business is on the right track. While it must be admitted that its growing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to cash burn. Shareholders can rejoice that analysts predict it will break even. After considering the various metrics mentioned in this report, we are quite comfortable with how the company is spending its money, as it appears to be on track to meet its medium-term needs. On a different note, we conducted a thorough investigation of the company and identified 4 warning signs for Lake Resources (1 cannot be ignored!) which you should be aware of before investing here.
If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have a high return on equity and low debt or this list of stocks which should all grow.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.