Just because a business isn’t making money doesn’t mean the stock will go down. For example, Lake resources (ASX: LKE) Shareholders have performed very well over the past year, with the share price climbing 800%. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
Given the strong performance of its share price, we believe it is worth asking Lake Resources shareholders if its cash consumption is of concern. For the purposes of this article, we’ll define cash consumption as the amount of cash the business spends each year to finance its growth (also known as negative free cash flow). The first step is to compare its cash consumption with its cash reserves, to give us its “cash flow track”.
Consult our latest analysis for the lake’s resources
When could Lake Resources run out of money?
You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. As of June 2021, Lake Resources had A $ 26 million in cash and was debt free. Looking at last year, the company burned A $ 7.2 million. So he had a cash flow trail of around 3.5 years from June 2021. There is no doubt that this is a long and reassuring trail. Pictured below, you can see how his cash holdings have changed over time.
How does Lake Resources’ cash consumption change over time?
Lake Resources has not recorded any revenue in the past year, indicating that it is a start-up company that continues to expand its business. Nonetheless, we can still examine its cash consumption trajectory as part of our assessment of its cash consumption situation. With a cash consumption rate up 7.8% over the past year, it looks like the company is increasing its investment in the business over time. This is not necessarily a bad thing, but investors should be aware that it will shorten the liquidity trail. Obviously, however, the crucial factor is whether the company will expand its business in the future. For this reason, it makes a lot of sense to take a look at our analyst forecast for the company.
How difficult would it be for Lake Resources to raise more cash for growth?
As its consumption of cash is increasing (albeit slightly), shareholders of Lake Resources should always be aware of the possibility that it will need more cash in the future. Businesses can raise capital through debt or equity. One of the main advantages of publicly traded companies is that they can sell stocks to investors to raise funds and finance their growth. We can compare a company’s cash consumption to its market capitalization to get an idea of how many new shares a company would need to issue to fund its one-year operations.
Given that it has a market capitalization of AU $ 717 million, Lake Resources’ cash consumption of AU $ 7.2 million is equivalent to approximately 1.0% of its market value. So he could almost certainly borrow a little to finance another year’s growth, or he could easily raise cash by issuing a few shares.
How risky is Lake Resources’ cash flow situation?
It may already be obvious to you that we are relatively comfortable with the way Lake Resources burns its cash. For example, we think his cash flow trail suggests the business is on the right track. Although its growing consumption of cash has not been significant, the other factors mentioned in this article more than make up for the weakness of this measure. After looking at a series of factors in this article, we’re pretty relaxed about its consumption of cash, as the company appears to be in a good position to continue funding its growth. Diving deeper, we spotted 4 warning signs for lake resources you need to be aware, and 2 of them are a bit rude.
Sure Lake Resources may not be the best stock to buy. So you might want to see this free a set of companies offering a high return on equity, or that list of stocks that insiders buy.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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