We believe Emerita Resources (CVE:EMO) can afford to drive the company’s growth

Just because a company isn’t making money doesn’t mean the stock will go down. Indeed, Distinguished Resources (CVE:EMO) The stock is up 1,675% over the past year, delivering solid gains for shareholders. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.

Given its strong share price performance, we think it’s worth asking Emerita Resources shareholders whether its cash burn is a concern. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. Let’s start with a review of the company’s cash flow, relative to its cash burn.

Check out our latest analysis for Emerita Resources

How long is the Emerita Resources cash trail?

A company’s cash trail is calculated by dividing its cash hoard by its cash burn. As of September 2021, Emerita Resources had C$27 million in cash and no debt. Importantly, its cash burn was C$4.3 million over the last twelve months. Therefore, as of September 2021, it had 6.2 years of cash trail. While this is just a measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how his cash balance has changed over the past few years.

TSXV:EMO Debt to Equity Historical January 30, 2022

How is Emerita Resources’ cash burn changing over time?

Emerita Resources has not recorded any revenue in the past year, indicating that it is an early-stage company that is still expanding its business. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. In fact, he has dramatically increased his spending over the past year, increasing cash burn by 176%. With spending growing so rapidly, shareholders are hoping the cash will be spent wisely. Emerita Resources makes us a bit nervous due to its lack of substantial operating revenue. We prefer most stocks on this list of stocks that analysts expect to see growth.

Can Emerita resources raise more money easily?

Given its cash burn trajectory, Emerita Resources shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. In general, a listed company can raise new funds by issuing shares or by going into debt. Many companies end up issuing new shares to fund their future growth. We can compare a company’s cash burn to its market capitalization to get an idea of ​​how many new shares a company would need to issue to fund a year’s operations.

Emerita Resources has a market capitalization of C$548 million and burned C$4.3 million last year, or 0.8% of the company’s market value. So he could almost certainly borrow a little to fund another year’s growth, or he could easily raise cash by issuing a few shares.

How risky is Emerita Resources’ cash burn situation?

As you can probably tell by now, we’re not too worried about Emerita Resources’ cash burn. For example, we think its cash trail suggests the business is on the right track. While it must be admitted that its growing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to cash burn. Looking at all the metrics in this article, together, we’re not worried about its cash burn rate; the company appears to be well above its medium-term spending needs. On another note, Emerita Resources has 5 warning signs (and 3 that we don’t like too much) that we think you should know about.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders are buying, and this list of growth stocks (based on analyst forecasts)

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

About Raymond Lang

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