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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether South Star Battery Metals (CVE:STS) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. 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 South Star Battery Metals

Does South Star Battery Metals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2024, South Star Battery Metals had CA$9.9m in cash, and was debt-free. Importantly, its cash burn was CA$17m over the trailing twelve months. That means it had a cash runway of around 7 months as of March 2024. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

Can South Star Battery Metals Raise More Cash Easily?

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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Since it has a market capitalisation of CA$34m, South Star Battery Metals' CA$17m in cash burn equates to about 51% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About South Star Battery Metals' Cash Burn?

Because South Star Battery Metals is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. We would undoubtedly be more comfortable if it had reported some operating revenue. Having said that, we can say that its cash runway was a real negative. To be blunt, it does seem to be burning through cash very quickly, and that is very likely to lead to dilution for all shareholders, reducing long term returns, even in the best case scenario. Taking a deeper dive, we've spotted 5 warning signs for South Star Battery Metals you should be aware of, and 4 of them are potentially serious.