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Just because a business does not make any money, does not mean that the stock will go down. Indeed, Pan Asia Metals (ASX:PAM) stock is up 261% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Pan Asia Metals shareholders to consider whether its cash burn is concerning. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Pan Asia Metals
How Long Is Pan Asia Metals' 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. As at December 2021, Pan Asia Metals had cash of US$5.3m and no debt. In the last year, its cash burn was US$2.5m. That means it had a cash runway of about 2.1 years as of December 2021. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is Pan Asia Metals' Cash Burn Changing Over Time?
Because Pan Asia Metals isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 156%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Pan Asia Metals 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.
Can Pan Asia Metals Raise More Cash Easily?
Given its cash burn trajectory, Pan Asia Metals shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.