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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we’d take a look at whether Montero Mining and Exploration (CVE:MON) shareholders should be worried about its cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Montero Mining and Exploration’s 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. In June 2019, Montero Mining and Exploration had CA$13k in cash, and was debt-free. Looking at the last year, the company burnt through CA$451k. Therefore, from June 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! The image below shows how its cash balance has been changing over the last few years.
How Is Montero Mining and Exploration’s Cash Burn Changing Over Time?
Because Montero Mining and Exploration 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. As it happens, the company’s cash burn reduced by 50% over the last year, which suggests that management are mindful of the possibility of running out of cash. Montero Mining and Exploration 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 Montero Mining and Exploration Raise More Cash Easily?
There’s no doubt Montero Mining and Exploration’s rapidly reducing cash burn brings comfort, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Montero Mining and Exploration has a market capitalisation of CA$875k and burnt through CA$451k last year, which is 52% of the company’s market value. That’s high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
How Risky Is Montero Mining and Exploration’s Cash Burn Situation?
As you can probably tell by now, we’re rather concerned about Montero Mining and Exploration’s cash burn. 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. Once we consider the metrics mentioned in this article together, we’re left with very little confidence in the company’s ability to manage its cash burn, and we think it will probably need more money. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Montero Mining and Exploration CEO is paid..
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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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.