Will Carpentaria Resources (ASX:CAP) Spend Its Cash Wisely?

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 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Carpentaria Resources (ASX:CAP) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Carpentaria Resources

Does Carpentaria Resources Have A Long Cash Runway?

You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In June 2019, Carpentaria Resources had AU$3.0m in cash, and was debt-free. In the last year, its cash burn was AU$2.0m. That means it had a cash runway of around 19 months as of June 2019. 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. You can see how its cash balance has changed over time in the image below.

ASX:CAP Historical Debt, January 1st 2020
ASX:CAP Historical Debt, January 1st 2020

How Is Carpentaria Resources’s Cash Burn Changing Over Time?

While Carpentaria Resources did record statutory revenue of AU$3.6k over the last year, it didn’t have any revenue from operations. To us, that makes it a pre-revenue company, so we’ll look to its cash burn trajectory as an assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 23% over the last year suggests some degree of prudence. Carpentaria Resources 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 Hard Would It Be For Carpentaria Resources To Raise More Cash For Growth?

While Carpentaria Resources 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.

Carpentaria Resources’s cash burn of AU$2.0m is about 22% of its AU$9.1m 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 Carpentaria Resources’s Cash Burn?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Carpentaria Resources’s cash runway was relatively 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. 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 Carpentaria Resources CEO is paid..

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.

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.

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