Stock Analysis

We're A Little Worried About Gateway Mining's (ASX:GML) Cash Burn Rate

ASX:GML
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Gateway Mining (ASX:GML) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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 our latest analysis for Gateway Mining

When Might Gateway Mining 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. When Gateway Mining last reported its balance sheet in June 2021, it had zero debt and cash worth AU$3.6m. Importantly, its cash burn was AU$6.4m over the trailing twelve months. So it had a cash runway of approximately 7 months from June 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:GML Debt to Equity History October 11th 2021

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

Although Gateway Mining reported revenue of AU$75k 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. During the last twelve months, its cash burn actually ramped up 52%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Gateway Mining makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Gateway Mining Raise Cash?

Given its cash burn trajectory, Gateway Mining shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 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).

Gateway Mining has a market capitalisation of AU$32m and burnt through AU$6.4m last year, which is 20% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Gateway Mining's Cash Burn A Worry?

On this analysis of Gateway Mining's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, Gateway Mining has 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.

Of course Gateway Mining 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.

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