We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we’d take a look at whether Chalice Gold Mines (ASX:CHN) 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Chalice Gold Mines
When Might Chalice Gold Mines Run Out Of Money?
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 Chalice Gold Mines last reported its balance sheet in June 2019, it had zero debt and cash worth AU$20m. In the last year, its cash burn was AU$8.7m. That means it had a cash runway of about 2.3 years as of June 2019. Arguably, that’s a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Is Chalice Gold Mines’s Cash Burn Changing Over Time?
In our view, Chalice Gold Mines doesn’t yet produce significant amounts of operating revenue, since it reported just AU$671k in the last twelve months. 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. Even though it doesn’t get us excited, the 44% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we’re a bit cautious of Chalice Gold Mines 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 Chalice Gold Mines To Raise More Cash For Growth?
While Chalice Gold Mines 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.
Chalice Gold Mines has a market capitalisation of AU$49m and burnt through AU$8.7m last year, which is 18% of the company’s market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is Chalice Gold Mines’s Cash Burn A Worry?
Chalice Gold Mines appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash burn reduction quite good, but its cash runway was a real positive. Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. 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 Chalice Gold Mines’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 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. Thank you for reading.