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, Iris Energy (NASDAQ:IREN) shareholders have done very well over the last year, with the share price soaring by 171%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Iris Energy's cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Does Iris Energy Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Iris Energy last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth US$411m. In the last year, its cash burn was US$427m. So it had a cash runway of approximately 12 months from June 2024. Notably, analysts forecast that Iris Energy will break even (at a free cash flow level) in about 17 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Iris Energy Growing?

One thing for shareholders to keep front in mind is that Iris Energy increased its cash burn by 288% in the last twelve months. Of course, the truly verdant revenue growth of 148% in that time may well justify the growth spend. Considering both these factors, we're not particularly excited by its growth profile. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For Iris Energy To Raise More Cash For Growth?

Given the trajectory of Iris Energy's cash burn, many investors will already be thinking about how it might 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. 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 US$1.7b, Iris Energy's US$427m in cash burn equates to about 25% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Iris Energy's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Iris Energy's revenue growth was relatively promising. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Iris Energy's situation. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Iris Energy (1 is a bit concerning!) that you should be aware of before investing here.

Of course Iris Energy 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.

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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.