We Think Galileo Mining (ASX:GAL) Needs To Drive Business Growth Carefully

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Galileo Mining (ASX:GAL) 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.

See our latest analysis for Galileo Mining

How Long Is Galileo Mining's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2023, Galileo Mining had cash of AU$14m and no debt. Looking at the last year, the company burnt through AU$12m. So it had a cash runway of approximately 14 months from June 2023. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Is Galileo Mining's Cash Burn Changing Over Time?

Galileo Mining didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The skyrocketing cash burn up 170% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Admittedly, we're a bit cautious of Galileo Mining 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 Hard Would It Be For Galileo Mining To Raise More Cash For Growth?

Given its cash burn trajectory, Galileo Mining shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Galileo Mining's cash burn of AU$12m is about 24% of its AU$49m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Galileo Mining's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Galileo Mining's cash runway was relatively promising. Summing up, we think the Galileo Mining's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 5 warning signs for Galileo Mining you should be aware of, and 3 of them are concerning.

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.