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 software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. 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.
Given this risk, we thought we’d take a look at whether MRG Metals (ASX:MRQ) 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does MRG Metals 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. When MRG Metals last reported its balance sheet in December 2018, it had zero debt and cash worth AU$1.3m. Looking at the last year, the company burnt through AU$1.1m. That means it had a cash runway of around 14 months as of December 2018. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.
How Is MRG Metals’s Cash Burn Changing Over Time?
Whilst it’s great to see that MRG Metals has already begun generating revenue from operations, last year it only produced AU$16k, so we don’t think it is generating significant revenue, at this point. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 116%. It’s fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. MRG Metals makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For MRG Metals To Raise More Cash For Growth?
While MRG Metals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
MRG Metals’s cash burn of AU$1.1m is about 14% of its AU$7.7m market capitalisation. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit probably at the cost of some dilution.
How Risky Is MRG Metals’s Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought MRG Metals’s cash burn relative to its market cap was truly promising. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. 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 MRG Metals’s CEO gets paid each year.If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.