There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Elixir Energy (ASX:EXR) 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. Let’s start with an examination of the business’ cash, relative to its cash burn.
Check out our latest analysis for Elixir Energy
How Long Is Elixir Energy’s Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2023, Elixir Energy had cash of AU$11m and no debt. Importantly, its cash burn was AU$18m over the trailing twelve months. That means it had a cash runway of around 8 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. Depicted below, you can see how its cash holdings have changed over time.
How Is Elixir Energy’s Cash Burn Changing Over Time?
Although Elixir Energy reported revenue of AU$1.7m 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. Over the last year its cash burn actually increased by 26%, 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. Admittedly, we’re a bit cautious of Elixir Energy due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Elixir Energy Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, Elixir Energy shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Elixir Energy has a market capitalisation of AU$116m and burnt through AU$18m last year, which is 15% of the company’s market value. 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 Elixir Energy’s Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Elixir Energy’s cash burn relative to its market cap was relatively promising. Summing up, we think the Elixir Energy’s cash burn is a risk, based on the factors we mentioned in this article. On another note, Elixir Energy has 6 warning signs (and 2 which shouldn’t be ignored) we think 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)
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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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
