We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Minaurum Gold (CVE:MGG) shareholders is whether they should be concerned by its rate of 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.
How Long Is Minaurum Gold’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. When Minaurum Gold last reported its balance sheet in April 2019, it had zero debt and cash worth CA$7.6m. Importantly, its cash burn was CA$5.2m over the trailing twelve months. Therefore, from April 2019 it had roughly 18 months of cash runway. 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. Depicted below, you can see how its cash holdings have changed over time.
How Is Minaurum Gold’s Cash Burn Changing Over Time?
Because Minaurum Gold isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 44%, which suggests that management are increasing investment in future growth, but not too quickly. That’s not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Minaurum Gold makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Minaurum Gold Raise Cash?
While Minaurum Gold 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.
Minaurum Gold has a market capitalisation of CA$124m and burnt through CA$5.2m last year, which is 4.2% of the company’s market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
Is Minaurum Gold’s Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Minaurum Gold’s cash burn relative to its market cap was truly promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we’re not too worried about its rate of cash burn. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Minaurum Gold insiders have been trading shares in the company. Click here to find out if they have been buying or selling.Of course Minaurum Gold may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.