We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether Goldquest Mining (CVE:GQC) shareholders should be worried about its 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). We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Goldquest Mining Have A Long 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 September 2019, Goldquest Mining had cash of CA$17m and no debt. Looking at the last year, the company burnt through CA$2.0m. That means it had a cash runway of about 8.5 years as of September 2019. Importantly, though, the one analyst we see covering the stock thinks that Goldquest Mining will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.
How Is Goldquest Mining’s Cash Burn Changing Over Time?
Goldquest Mining didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The 61% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. While the past is always worth studying, it is the future that matters most of all. 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 Goldquest Mining To Raise More Cash For Growth?
While we’re comforted by the recent reduction evident from our analysis of Goldquest Mining’s cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).
Goldquest Mining’s cash burn of CA$2.0m is about 6.1% of its CA$33m 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.
Is Goldquest Mining’s Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about Goldquest Mining’s cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Goldquest Mining CEO receives in total remuneration.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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