There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Stellar Resources (ASX:SRZ) has seen its share price rise 129% over the last year, delighting many shareholders. 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.

In light of its strong share price run, we think now is a good time to investigate how risky Stellar Resources' cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Stellar Resources

How Long Is Stellar Resources' Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2024, Stellar Resources had cash of AU$10m and no debt. In the last year, its cash burn was AU$2.3m. That means it had a cash runway of about 4.5 years as of June 2024. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.

How Is Stellar Resources' Cash Burn Changing Over Time?

While Stellar Resources did record statutory revenue of AU$70k over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 28% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Stellar Resources due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For Stellar Resources To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Stellar Resources to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Stellar Resources' cash burn of AU$2.3m is about 6.9% of its AU$33m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Stellar Resources' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Stellar Resources is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Stellar Resources has 4 warning signs (and 2 which make us uncomfortable) we think you should know about.

Of course Stellar Resources may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.