Is Castillo Copper (ASX:CCZ) In A Good Position To Invest In Growth?

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Castillo Copper (ASX:CCZ) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out the opportunities and risks within the AU Metals and Mining industry.

How Long Is Castillo Copper's Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Castillo Copper last reported its balance sheet in June 2022, it had zero debt and cash worth AU$5.8m. Looking at the last year, the company burnt through AU$6.5m. Therefore, from June 2022 it had roughly 11 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. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. Depicted below, you can see how its cash holdings have changed over time.

How Is Castillo Copper's Cash Burn Changing Over Time?

Although Castillo Copper reported revenue of AU$145k last year, it didn't actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Over the last year its cash burn actually increased by a very significant 78%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Castillo Copper 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 Castillo Copper To Raise More Cash For Growth?

Given its cash burn trajectory, Castillo Copper shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of AU$34m, Castillo Copper's AU$6.5m in cash burn equates to about 19% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Castillo Copper's Cash Burn?

On this analysis of Castillo Copper's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Castillo Copper (of which 1 can't be ignored!) you should know about.

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.

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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.