Just because a business isn’t making money doesn’t mean the stock will go down. Indeed, S2 resources (ASX: S2R) the stock has risen 120% over the past year, delivering solid gains to shareholders. That said, unprofitable businesses are risky because they could potentially spend all of their money and end up in distress.

So, despite the strong share price, we believe it is worth considering whether S2 Resources’ cash consumption is too risky. 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.

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How long is S2 Resources’ cash flow track?

You can calculate a company’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that cash. When S2 Resources last published its balance sheet in December 2020, it had no debt and cash worth AU $ 15 million. In the past year, its cash consumption was AU $ 4.6 million. So he had a cash flow trail of around 3.1 years as of December 2020. There is no doubt that this is a reassuringly long trail. Pictured below, you can see how his cash holdings have changed over time.

How does S2 Resources’ money consumption change over time?

Since S2 Resources does not currently generate any revenue, we consider it to be a start-up company. Nonetheless, we can still examine its cash consumption trajectory as part of our assessment of its cash consumption situation. While we’re not excited about it, the 26% year-over-year reduction in cash usage suggests the business can continue to operate for some time. S2 Resources is making us a little nervous due to its lack of substantial operating income. We prefer most stocks on that list of stocks that analysts expect to grow.

Can S2 resources easily raise more money?

Even though it recently reduced its cash consumption, shareholders should still consider how easy it would be for S2 Resources to raise more cash in the future. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. One of the main advantages held by publicly traded companies is that they can sell stocks to investors to raise funds and finance 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 keep the business running for another year (at the same burn rate).

As it has a market capitalization of AU $ 54 million, S2 Resources’ cash consumption of AU $ 4.6 million is equivalent to approximately 8.6% of its market value. Given that this is a rather small percentage, it would probably be very easy for the company to finance the growth of another year by issuing new shares to investors, or even taking out a loan.

So, should we be worried about S2 Resources’ cash consumption?

As you can probably see by now, we are not too worried about S2 Resources’ cash consumption. In particular, we believe that its cash flow track is proof that the company has good control over its spending. And while his reduction in cash consumption wasn’t as impressive, it was still positive. After taking into account the various measures mentioned in this report, we are quite comfortable with the way the company is spending its money, as it seems to be on track to meet its needs in the medium term. It is important for readers to be aware of the risks that can affect business operations, and we have selected 3 warning signs for S2 resources that investors need to know when investing in stocks.

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This Simply Wall St article is general in nature. 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 any of the stocks mentioned.
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