Stock Analysis

Is Castle Minerals (ASX:CDT) In A Good Position To Invest In Growth?

ASX:CDT
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Just because a business does not make any money, does not mean that the stock will go down. Indeed, Castle Minerals (ASX:CDT) stock is up 260% 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.

Given its strong share price performance, we think it's worthwhile for Castle Minerals shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Castle Minerals

Does Castle Minerals Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, Castle Minerals had AU$1.8m in cash, and was debt-free. Looking at the last year, the company burnt through AU$1.9m. So it had a cash runway of approximately 11 months from June 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:CDT Debt to Equity History January 4th 2022

How Is Castle Minerals' Cash Burn Changing Over Time?

In our view, Castle Minerals doesn't yet produce significant amounts of operating revenue, since it reported just AU$255 in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Remarkably, it actually increased its cash burn by 332% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Admittedly, we're a bit cautious of Castle Minerals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Castle Minerals Raise Cash?

Given its cash burn trajectory, Castle Minerals 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. Many companies end up issuing new shares to fund future 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$31m, Castle Minerals' AU$1.9m in cash burn equates to about 6.2% of its 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.

So, Should We Worry About Castle Minerals' Cash Burn?

On this analysis of Castle Minerals' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. 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. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Castle Minerals (of which 3 shouldn't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.