Yahoo Finance We're Not Very Worried About Leading Edge Materials' (CVE:LEM) Cash Burn Rate
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Leading Edge Materials (CVE:LEM) shareholders have done very well over the last year, with the share price soaring by 261%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
In light of its strong share price run, we think now is a good time to investigate how risky Leading Edge Materials' cash burn is. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Leading Edge Materials
When Might Leading Edge Materials 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 October 2020, Leading Edge Materials had CA$3.4m in cash, and was debt-free. Looking at the last year, the company burnt through CA$1.6m. So it had a cash runway of about 2.1 years from October 2020. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.
How Is Leading Edge Materials' Cash Burn Changing Over Time?
Leading Edge Materials didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 23% over the last year suggests some degree of prudence. Leading Edge Materials 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 Hard Would It Be For Leading Edge Materials To Raise More Cash For Growth?
While Leading Edge Materials is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Leading Edge Materials' cash burn of CA$1.6m is about 3.3% of its CA$48m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
So, Should We Worry About Leading Edge Materials' Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Leading Edge Materials is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Its cash burn reduction wasn't quite as good, but was still rather encouraging! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Leading Edge Materials (of which 1 shouldn't be ignored!) you should know about.
Of course Leading Edge Materials 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.
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. 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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