We're Keeping An Eye On AuMEGA Metals' (ASX:AAM) Cash Burn Rate

Simply Wall St · 10/14 23:45

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should AuMEGA Metals (ASX:AAM) 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'.

Check out our latest analysis for AuMEGA Metals

How Long Is AuMEGA Metals' Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When AuMEGA Metals last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth CA$6.2m. Importantly, its cash burn was CA$7.4m over the trailing twelve months. Therefore, from June 2024 it had roughly 10 months of cash runway. 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.

debt-equity-history-analysis
ASX:AAM Debt to Equity History October 14th 2024

How Is AuMEGA Metals' Cash Burn Changing Over Time?

Because AuMEGA Metals isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. As it happens, the company's cash burn reduced by 4.9% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can AuMEGA Metals Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for AuMEGA Metals to raise more cash in the future. 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. 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.

AuMEGA Metals has a market capitalisation of CA$28m and burnt through CA$7.4m last year, which is 27% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About AuMEGA Metals' Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought AuMEGA Metals' cash burn reduction was relatively promising. Summing up, we think the AuMEGA Metals' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 7 warning signs for AuMEGA Metals (of which 4 are potentially serious!) 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)