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Companies Like Aguia Resources (ASX:AGR) Are In A Position To Invest In Growth

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 Aguia Resources (ASX:AGR) shareholders is whether they should be concerned by its rate of cash burn. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Aguia Resources

Does Aguia Resources Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Aguia Resources last reported its balance sheet in December 2021, it had zero debt and cash worth AU$5.2m. Importantly, its cash burn was AU$2.4m over the trailing twelve months. So it had a cash runway of about 2.2 years from 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.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Aguia Resources' Cash Burn Changing Over Time?

Aguia Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. Even though it doesn't get us excited, the 24% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Aguia 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.

Can Aguia Resources Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Aguia Resources to raise more cash in the future. 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.

Aguia Resources' cash burn of AU$2.4m is about 8.3% of its AU$29m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About Aguia Resources' Cash Burn?

As you can probably tell by now, we're not too worried about Aguia Resources' cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 5 warning signs for Aguia Resources you should be aware of, and 2 of them make us uncomfortable.

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.

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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.