Here's Why We're Not Too Worried About Havilah Resources' (ASX:HAV) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Havilah Resources (ASX:HAV) has seen its share price rise 138% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Havilah Resources shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Havilah Resources

How Long Is Havilah Resources' 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. As at January 2021, Havilah Resources had cash of AU$5.9m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was AU$2.9m over the trailing twelve months. That means it had a cash runway of about 2.0 years as of January 2021. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.

How Is Havilah Resources' Cash Burn Changing Over Time?

In our view, Havilah Resources doesn't yet produce significant amounts of operating revenue, since it reported just AU$167k 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. The 57% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Admittedly, we're a bit cautious of Havilah Resources 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 Havilah Resources To Raise More Cash For Growth?

There's no doubt Havilah Resources' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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. 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.

Havilah Resources' cash burn of AU$2.9m is about 4.7% of its AU$61m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Havilah Resources' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Havilah Resources' cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. But it's fair to say that its cash runway was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Havilah Resources (2 are concerning!) that you should be aware of before investing here.

Of course Havilah Resources 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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