Will Red Metal (ASX: RDM) spend its money wisely?


Even when a business loses money, it is possible for shareholders to make money if they buy a good business at the right price. For example, although the software as a service company Salesforce.com lost money for years as it increased its recurring revenue, if you had owned stocks since 2005, you would have done very well. But while history praises these rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Red Metal (ASX: RDM) Are shareholders worried about its consumption of cash? In this article, we define cash consumption as its annual (negative) free cash flow, that is, the amount that a company spends each year to finance its growth. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash flow track.

See our latest review for Red Metal

When could Red Metal run out of money?

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 Red Metal last published its balance sheet in June 2021, it had no debt and cash worth AU $ 2.5 million. Importantly, his cash consumption was AU $ 1.6 million in the past twelve months. Therefore, as of June 2021, he had around 19 months of cash flow. While this liquidity trail is not too much of a concern, sane holders would look into the distance and consider what would happen if the company ran out of cash. The image below shows how her cash balance has evolved over the past few years.

ASX: RDM Debt to equity history October 17, 2021

How well does red metal grow?

Notably, Red Metal has increased its consumption of cash very hard and rapidly over the past year, by 196%, which signifies a significant investment in the business. While this is worrying in itself, the fact that operating revenue actually fell 16% over the same time frame really makes us shake. In light of the above, we are quite suspicious of the trajectory the company appears to be on. Of course, we’ve only taken a quick look at the stock’s growth indicators here. This historical profit and revenue chart shows how Red Metal is growing its business over time.

How easily can Red Metal raise money?

Red Metal’s revenues are declining and its cash consumption is increasing, so many may consider its need to raise more cash in the future. Businesses can raise capital through debt or equity. Many companies end up issuing new shares to fund their future growth. By looking at one company’s cash consumption relative to its market capitalization, we get an idea of ​​how many shareholders would be diluted if the company needed to raise enough cash to cover another’s cash consumption. year.

Red Metal has a market cap of A $ 28 million and spent A $ 1.6 million last year, or 5.6% of the company’s market value. This is a small proportion, so we think the company would be able to raise more cash to finance its growth, with a slight dilution, or even just to borrow money.

Is Red Metal’s Cash Burn a Problem?

Even though its growing consumption of cash makes us a little nervous, we are forced to mention that we thought Red Metal’s consumption of cash relative to its market cap was relatively promising. We don’t think its cash consumption is particularly problematic, but after looking at the range of factors in this article, we think shareholders should watch how it evolves over time. A thorough examination of the risks revealed 2 warning signs for red metal which readers should think about before committing capital to this stock.

Sure Red Metal might not be the best stock to buy. So you might want to see this free a set of companies with a high return on equity, or that list of stocks that insiders buy.

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 documents. Simply Wall St has no position in the mentioned stocks.

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