Is Carpentaria Resources (ASX:CAP) In A Good Position To Deliver On Growth Plans?

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. 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.

So should Carpentaria Resources (ASX:CAP) shareholders be worried about its cash burn? 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Carpentaria Resources

When Might Carpentaria Resources Run Out Of Money?

You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2019, Carpentaria Resources had cash of AU$1.9m and no debt. Importantly, its cash burn was AU$2.0m over the trailing twelve months. That means it had a cash runway of around 12 months as of December 2019. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

ASX:CAP Historical Debt May 11th 2020
ASX:CAP Historical Debt May 11th 2020

How Is Carpentaria Resources’s Cash Burn Changing Over Time?

Because Carpentaria Resources isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Admittedly, we’re a bit cautious of Carpentaria 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 Carpentaria Resources To Raise More Cash For Growth?

Since its cash burn is increasing (albeit only slightly), Carpentaria Resources shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).

Since it has a market capitalisation of AU$6.3m, Carpentaria Resources’s AU$2.0m in cash burn equates to about 32% of its market value. That’s fairly notable cash burn, so if the company had to sell shares to cover the cost of another year’s operations, shareholders would suffer some costly dilution.

So, Should We Worry About Carpentaria Resources’s Cash Burn?

We must admit that we don’t think Carpentaria Resources is in a very strong position, when it comes to its cash burn. While its increasing cash burn wasn’t too bad, its cash burn relative to its market cap does leave us rather nervous. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Carpentaria Resources (of which 1 is potentially serious!) you should know about.

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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