We can readily understand why investors are attracted to unprofitable companies. 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 should Empire Resources (ASX:ERL) 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's cash, relative to its cash burn.

View our latest analysis for Empire Resources

Does Empire Resources Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Empire Resources last reported its balance sheet in June 2019, it had zero debt and cash worth AU$983k. In the last year, its cash burn was AU$2.3m. That means it had a cash runway of around 5 months as of June 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. Depicted below, you can see how its cash holdings have changed over time.

Is Empire Resources's Revenue Growing?

Given that Empire Resources actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The harsh truth is that operating revenue dropped 67% in the last year, which is quite problematic for a cash burning company. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Empire Resources is building its business over time.

Can Empire Resources Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Empire Resources 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Empire Resources's cash burn of AU$2.3m is about 41% of its AU$5.6m market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About Empire Resources's Cash Burn?

As you can probably tell by now, we're rather concerned about Empire Resources's cash burn. Take, for example, its falling revenue, which suggests the company may have difficulty funding itself, in the future. And although we accept its cash burn relative to its market cap wasn't as worrying as its falling revenue, it was still a real negative; as indeed were all the factors we considered in this article. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Empire Resources insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.