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Dilution Ahead For Asiamet Resources Limited (LON:ARS) Shareholders?

Simply Wall St

As the UK£33m market cap Asiamet Resources Limited (LON:ARS) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Selling new shares may dilute the value of existing shares on issue, and since Asiamet Resources is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Looking at Asiamet Resources’s latest financial data, I will estimate when the company may run out of cash and need to raise more money.

See our latest analysis for Asiamet Resources

What is cash burn?

Asiamet Resources currently has US$463k in the bank, with negative free cash flow of -US$8.8m. The biggest threat facing Asiamet Resources investors is the company going out of business when it runs out of money and cannot raise any more capital. Not surprisingly, it is more common to find unprofitable companies in the high-risk metals and mining industry. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.

AIM:ARS Income Statement, September 19th 2019

When will Asiamet Resources need to raise more cash?

One way to measure the cost to Asiamet Resources of keeping the business running, is by using free cash flow (which I define as cash flow from operations minus fixed capital investment).

In Asiamet Resources’s case, its cash outflows fell by 42% last year, which may signal the company moving towards a more sustainable level of expenses. Given the level of cash left in the bank, if Asiamet Resources maintained its cash burn rate of -US$8.8m, it could still run out of cash within the next few of months. Even though this is analysis is fairly basic, and Asiamet Resources still can cut its overhead further, or borrow money instead of raising new equity capital, this analysis still helps us understand how sustainable the Asiamet Resources operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from Asiamet Resources, but rather, to help you better understand the risks involved investing in loss-making companies. The outcome of my analysis suggests that even if the company maintains this rate of cash burn growth, it will run out of cash within the year. The potential equity raising resulting from this means you might be able to get shares at a lower price if the company raises capital next. This is only a rough assessment of financial health, and ARS likely also has company-specific issues impacting its cash management decisions. You should continue to research Asiamet Resources to get a more holistic view of the company by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ARS’s future growth? Take a look at our free research report of analyst consensus for ARS’s outlook.
  2. Valuation: What is ARS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether ARS is currently mispriced by the market.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.