We're A Little Worried About Euro Sun Mining's (TSE:ESM) Cash Burn Rate

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, 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.

Given this risk, we thought we'd take a look at whether Euro Sun Mining (TSE:ESM) 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.

Check out our latest analysis for Euro Sun Mining

When Might Euro Sun Mining 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 Euro Sun Mining last reported its balance sheet in September 2019, it had zero debt and cash worth US$184k. In the last year, its cash burn was US$6.7m. Therefore, from September 2019 it seems to us it had less than two months of cash runway. It's extremely surprising to us that the company has allowed its cash runway to get that short! Depicted below, you can see how its cash holdings have changed over time.

How Is Euro Sun Mining's Cash Burn Changing Over Time?

Euro Sun 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. It's possible that the 16% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Euro Sun Mining 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.

Can Euro Sun Mining Raise More Cash Easily?

While Euro Sun Mining 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. Commonly, a business will sell new shares in itself to raise cash to drive 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).

Euro Sun Mining's cash burn of US$6.7m is about 34% of its CA$26m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Euro Sun Mining's Cash Burn?

As you can probably tell by now, we're rather concerned about Euro Sun Mining's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. While not as bad as its cash runway, its cash burn reduction is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Euro Sun Mining insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

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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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.