We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should International Samuel Exploration (CVE:ISS) shareholders 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. Let’s start with an examination of the business’s cash, relative to its cash burn.
Does International Samuel Exploration Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2019, International Samuel Exploration had cash of CA$5.1k and no debt. Importantly, its cash burn was CA$596k over the trailing twelve months. So it seems to us it had a cash runway of less than two months from September 2019. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.
How Is International Samuel Exploration’s Cash Burn Changing Over Time?
Because International Samuel Exploration isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Given the length of the cash runway, we’d interpret the 41% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we’re a bit cautious of International Samuel Exploration due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can International Samuel Exploration Raise More Cash Easily?
While International Samuel Exploration is showing a solid reduction in its cash burn, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. 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 to drive growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
International Samuel Exploration has a market capitalisation of CA$508k and burnt through CA$596k last year, which is 117% of the company’s market value. That suggests the company may have some funding difficulties, and we’d be very wary of the stock.
How Risky Is International Samuel Exploration’s Cash Burn Situation?
There are no prizes for guessing that we think International Samuel Exploration’s cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. The measures we’ve considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what International Samuel Exploration’s CEO gets paid each year.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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