There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Bougainville Copper (ASX:BOC) shareholders have done very well over the last year, with the share price soaring by 114%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky Bougainville Copper's cash burn is. 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.
When Might Bougainville Copper 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 Bougainville Copper last reported its balance sheet in June 2021, it had zero debt and cash worth K7.4m. Looking at the last year, the company burnt through K4.7m. So it had a cash runway of approximately 19 months from June 2021. 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. The image below shows how its cash balance has been changing over the last few years.
How Is Bougainville Copper's Cash Burn Changing Over Time?
In the last year, Bougainville Copper did book revenue of K4.0m, but its revenue from operations was less, at just K272k. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 42% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Bougainville Copper due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Bougainville Copper Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Bougainville Copper to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Since it has a market capitalisation of K899m, Bougainville Copper's K4.7m in cash burn equates to about 0.5% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Bougainville Copper's Cash Burn Situation?
As you can probably tell by now, we're not too worried about Bougainville Copper's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Its cash runway wasn't quite as good, but was still rather encouraging! Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Bougainville Copper has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
Of course Bougainville Copper 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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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.