UK markets close in 5 hours 50 minutes
  • FTSE 100

    7,155.73
    +96.28 (+1.36%)
     
  • FTSE 250

    22,806.23
    +286.51 (+1.27%)
     
  • AIM

    1,192.80
    +5.24 (+0.44%)
     
  • GBP/EUR

    1.1751
    +0.0025 (+0.21%)
     
  • GBP/USD

    1.3313
    +0.0012 (+0.09%)
     
  • BTC-GBP

    42,782.18
    -156.29 (-0.36%)
     
  • CMC Crypto 200

    1,466.06
    +23.29 (+1.61%)
     
  • S&P 500

    4,567.00
    -88.27 (-1.90%)
     
  • DOW

    34,483.72
    -652.22 (-1.86%)
     
  • CRUDE OIL

    69.10
    +2.92 (+4.41%)
     
  • GOLD FUTURES

    1,784.90
    +8.40 (+0.47%)
     
  • NIKKEI 225

    27,935.62
    +113.86 (+0.41%)
     
  • HANG SENG

    23,658.92
    +183.66 (+0.78%)
     
  • DAX

    15,317.97
    +217.84 (+1.44%)
     
  • CAC 40

    6,805.80
    +84.64 (+1.26%)
     

We're Interested To See How European Metals Holdings (ASX:EMH) Uses Its Cash Hoard To Grow

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
·3-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Just because a business does not make any money, does not mean that the stock will go down. For example, European Metals Holdings (ASX:EMH) shareholders have done very well over the last year, with the share price soaring by 235%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for European Metals Holdings shareholders to consider whether its cash burn is concerning. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for European Metals Holdings

Does European Metals Holdings Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, European Metals Holdings had cash of AU$7.9m and no debt. Importantly, its cash burn was AU$2.3m over the trailing twelve months. So it had a cash runway of about 3.4 years from June 2021. 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.

debt-equity-history-analysis
debt-equity-history-analysis

How Is European Metals Holdings' Cash Burn Changing Over Time?

Whilst it's great to see that European Metals Holdings has already begun generating revenue from operations, last year it only produced AU$1.1m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 4.5%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. European Metals Holdings makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can European Metals Holdings Raise Cash?

Since its cash burn is increasing (albeit only slightly), European Metals Holdings shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

European Metals Holdings' cash burn of AU$2.3m is about 1.0% of its AU$235m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is European Metals Holdings' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about European Metals Holdings' cash burn. 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. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Separately, we looked at different risks affecting the company and spotted 4 warning signs for European Metals Holdings (of which 2 can't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting