We're Hopeful That Blackstone Minerals (ASX:BSX) Will Use 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. Indeed, Blackstone Minerals (ASX:BSX) stock is up 154% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Blackstone Minerals' cash burn is too risky. 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Blackstone Minerals

When Might Blackstone Minerals Run Out Of Money?

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. As at June 2020, Blackstone Minerals had cash of AU$6.8m and no debt. Looking at the last year, the company burnt through AU$6.8m. Therefore, from June 2020 it had roughly 12 months of cash runway. Notably, one analyst forecasts that Blackstone Minerals will break even (at a free cash flow level) in about 13 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. You can see how its cash balance has changed over time in the image below.

How Is Blackstone Minerals' Cash Burn Changing Over Time?

In our view, Blackstone Minerals doesn't yet produce significant amounts of operating revenue, since it reported just AU$46k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. During the last twelve months, its cash burn actually ramped up 56%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Blackstone Minerals Raise Cash?

Since its cash burn is moving in the wrong direction, Blackstone Minerals shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Blackstone Minerals has a market capitalisation of AU$143m and burnt through AU$6.8m last year, which is 4.8% 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 Blackstone Minerals' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Blackstone Minerals is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking a deeper dive, we've spotted 4 warning signs for Blackstone Minerals you should be aware of, and 3 of them are concerning.

Of course Blackstone Minerals 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. 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.
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