Will Element 25 (ASX:E25) Spend Its Cash Wisely?

·3 min read

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Element 25 (ASX:E25) shareholders is whether they should be concerned by its rate of 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Element 25

When Might Element 25 Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2021, Element 25 had cash of AU$31m and no debt. Looking at the last year, the company burnt through AU$26m. Therefore, from December 2021 it had roughly 14 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Element 25's Cash Burn Changing Over Time?

In our view, Element 25 doesn't yet produce significant amounts of operating revenue, since it reported just AU$11m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Remarkably, it actually increased its cash burn by 203% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. In reality, this article only makes a short study of the company's growth data. You can take a look at how Element 25 has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Element 25 To Raise More Cash For Growth?

Given its cash burn trajectory, Element 25 shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of AU$107m, Element 25's AU$26m in cash burn equates to about 25% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Element 25's Cash Burn A Worry?

On this analysis of Element 25's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Element 25's cash burn is a risk, based on the factors we mentioned in this article. On another note, Element 25 has 5 warning signs (and 2 which are concerning) 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.