Here's Why We're A Bit Worried About Amani Gold's (ASX:ANL) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Amani Gold (ASX:ANL) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Amani Gold

When Might Amani Gold 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. In June 2022, Amani Gold had AU$3.8m in cash, and was debt-free. Looking at the last year, the company burnt through AU$6.6m. Therefore, from June 2022 it had roughly 7 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. The image below shows how its cash balance has been changing over the last few years.

How Is Amani Gold's Cash Burn Changing Over Time?

In our view, Amani Gold doesn't yet produce significant amounts of operating revenue, since it reported just AU$901 in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 45%, 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. Admittedly, we're a bit cautious of Amani Gold due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Amani Gold Raise More Cash Easily?

Since its cash burn is moving in the wrong direction, Amani Gold shareholders may wish to think ahead to when the company may need to raise more cash. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Amani Gold's cash burn of AU$6.6m is about 18% of its AU$37m market capitalisation. 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.

So, Should We Worry About Amani Gold's Cash Burn?

On this analysis of Amani Gold's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Amani Gold (3 are significant!) that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.