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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, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should Sovereign Metals (ASX:SVM) shareholders be worried about its cash burn? For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.

View our latest analysis for Sovereign Metals

Does Sovereign Metals Have A Long Cash Runway?

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, Sovereign Metals had AU$39m in cash, and was debt-free. Looking at the last year, the company burnt through AU$12m. So it had a cash runway of about 3.2 years from December 2023. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis

How Is Sovereign Metals’ Cash Burn Changing Over Time?

Although Sovereign Metals reported revenue of AU$800k last year, it didn’t actually have any revenue from operations. To us, that makes it a pre-revenue company, so we’ll look to its cash burn trajectory as an assessment of its cash burn situation. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Sovereign Metals Raise More Cash Easily?

While Sovereign Metals 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.

Sovereign Metals’ cash burn of AU$12m is about 4.6% of its AU$267m 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.

Is Sovereign Metals’ Cash Burn A Worry?

It may already be apparent to you that we’re relatively comfortable with the way Sovereign Metals is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn’t too bad! After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Sovereign Metals (2 are concerning!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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

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.



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