Yahoo Finance Will IberAmerican Lithium (FRA:W2C) Spend Its Cash Wisely?
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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should IberAmerican Lithium (FRA:W2C) shareholders 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for IberAmerican Lithium
When Might IberAmerican Lithium Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In December 2023, IberAmerican Lithium had CA$3.4m in cash, and was debt-free. In the last year, its cash burn was CA$4.6m. That means it had a cash runway of around 9 months as of December 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Easily Can IberAmerican Lithium Raise Cash?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
IberAmerican Lithium's cash burn of CA$4.6m is about 16% of its CA$28m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is IberAmerican Lithium's Cash Burn A Worry?
Given it's an early stage company, we don't have a lot of data with which to judge IberAmerican Lithium's cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. And it is worth keeping in mind that early stage companies are generally more risky than well established ones. For us, the key takeaway here is that its cash burn is worth monitoring closely because it may have to raise more capital in due course. Separately, we looked at different risks affecting the company and spotted 5 warning signs for IberAmerican Lithium (of which 2 can't be ignored!) you should know about.
Of course IberAmerican Lithium may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.
