As the AUD $22.14M market cap Meteoric Resources NL ( ASX:MEI ) released another year of negative earnings, investors may be on edge waiting for breakeven. The single most important question to ask when you're investing in a loss-making company is – will they need to raise cash again, and if so, when? Today I've examined MEI's financial data to roughly assess when the company may need to raise new capital. See our latest analysis for MEI
What is cash burn?
MEI currently has $1.09M in the bank, with negative cash flows from operations of -$0.34M. The biggest threat facing MEI's investor is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as metals and mining. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will MEI need to raise more cash?
Opex declined by 8.27% over the past year, which could be an indication of MEI putting the brakes on ramping up high growth. If the company does not increase its opex next year and remains at the current level of $0.1M, then it should not need to raise further capital for the next few years. Although this is a relatively simplistic calculation, and MEI may continue to reduce its costs further or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the MEI's operation is, and when things may have to change.
What this means for you:
Are you a shareholder?Hopefully, the analysis has shed some light on the risks you should bear in mind as a shareholder of MEI, in particular, its tight cash runway moving forward. In addition to this analysis, I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well.
Are you a potential investor?Loss-making companies are a risky play, even those that are reducing their opex over time. Though, this shouldn't discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for MEI, due to its current level of cash reserves. This suggests an opportunity to enter into the stock, potentially at an attractive price, should MEI come to market to fund its growth.
Good management manages cash well – take a look at who sits on MEI's board and the CEO's back ground and experience here . If you believe you should cushion your portfolio with something less risky, scroll through my list of highly profitable companies to add to your portfolio. .
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
