It is easy to understand why investors are attracted to unprofitable companies. For exemple, Solaris Resources (TSE: SLS) has seen its share price rise 182% in the past year, delighting many shareholders. But while history praises these rare successes, those that fail are often forgotten; who remembers Pets.com?
In light of the sharp rise in its share price, we believe the time has come to consider how risky Solaris Resources’ cash consumption is. In this report, we will consider the company’s annual negative free cash flow, which we now call “cash burn”. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
See our latest analysis for Solaris resources
How long is the Solaris Resources treasury track?
A company’s cash flow trail is calculated by dividing its cash reserve by its cash consumption. As of June 2021, Solaris Resources had US $ 60 million in cash and no debt. Importantly, his cash consumption was US $ 31 million in the past twelve months. This means he had a cash trail of about 23 months in June 2021. It’s not that bad, but it’s fair to say that the end of the cash trail is in sight, unless consumption cash flow does not significantly reduce. The image below shows how her cash balance has evolved over the past few years.
How does Solaris Resources’ cash consumption change over time?
Since Solaris Resources does not currently generate any revenue, we consider it to be a start-up company. So while we can’t look at sales to understand growth, we can look at changes in cash consumption to understand changes in expenses over time. Remarkably, it has actually increased its cash consumption by 360% over the past year. With this type of spending growth, her cash flow trail will quickly shorten, as she simultaneously uses her cash while increasing the depletion rate. Obviously, however, the crucial factor is whether the company will expand its business in the future. You might want to take a look at how the business is expected to grow over the next few years.
How easily can Solaris resources raise funds?
Given its cash-consuming trajectory, Solaris Resources shareholders might consider how easily it could raise more cash, despite its strong liquidity trail. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Usually, a company will sell new stocks on its own to raise funds and stimulate growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to run the business for another year (at the same burn rate).
Solaris Resources has a market capitalization of US $ 1.0 billion and spent US $ 31 million last year, which is 3.0% of the market value of the company. 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 Solaris Resources’ cash position?
Even though its growing consumption of cash makes us a little nervous, we are obliged to mention that we thought Solaris Resources’ consumption of cash relative to its market capitalization was relatively promising. While we’re the type of investor that’s always a little concerned about the risks of money-burning companies, the metrics we’ve discussed in this article leave us relatively comfortable with Solaris Resources’ situation. On another note, we conducted a thorough investigation of the company and identified 3 warning signs for Solaris Resources (1 is a little worrying!) That you should know before investing here.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analysts’ forecasts)
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 material. Simply Wall St has no position in the mentioned stocks.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
If you are looking to trade Solaris resources, open an account with the cheapest * professional approved platform, Interactive Brokers. Their clients from more than 200 countries and territories trade stocks, options, futures, currencies, bonds and funds around the world from a single integrated account.Promoted