Companies Like S2 Resources (ASX:S2R) Are In A Position To Invest In Growth

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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for S2 Resources (ASX:S2R) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’ cash, relative to its cash burn.

View our latest analysis for S2 Resources

Does S2 Resources Have A Long Cash Runway?

You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2021, S2 Resources had AU$14m in cash, and was debt-free. Looking at the last year, the company burnt through AU$7.1m. Therefore, from December 2021 it had 2.0 years of cash runway. That’s not too bad, but it’s fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis

How Is S2 Resources’ Cash Burn Changing Over Time?

Although S2 Resources reported revenue of AU$190k last year, it didn’t actually have any revenue from operations. To us, that makes it a pre-revenue company, so we’ll look to its cash burn trajectory as an assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 55%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. S2 Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can S2 Resources Raise Cash?

While S2 Resources does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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).

S2 Resources has a market capitalisation of AU$53m and burnt through AU$7.1m last year, which is 13% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is S2 Resources’ Cash Burn A Worry?

On this analysis of S2 Resources’ cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. While we’re the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about S2 Resources’ situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for S2 Resources (of which 2 are potentially serious!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

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