Is Hillgrove Resources (ASX:HGO) In A Good Position To Deliver On Growth Plans?

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should Hillgrove Resources (ASX:HGO) shareholders 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.

View our latest analysis for Hillgrove Resources

Does Hillgrove Resources Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2020, Hillgrove Resources had cash of AU$5.6m and no debt. In the last year, its cash burn was AU$6.0m. Therefore, from December 2020 it had roughly 11 months of cash runway. 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. The image below shows how its cash balance has been changing over the last few years.

Is Hillgrove Resources' Revenue Growing?

Given that Hillgrove Resources actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 82%, which is rather concerning. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Hillgrove Resources has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Hillgrove Resources To Raise More Cash For Growth?

Since its revenue growth is moving in the wrong direction, Hillgrove Resources shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.

Hillgrove Resources has a market capitalisation of AU$46m and burnt through AU$6.0m last year, which is 13% 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.

So, Should We Worry About Hillgrove Resources' Cash Burn?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Hillgrove Resources' cash burn relative to its market cap was relatively promising. Summing up, we think the Hillgrove Resources' cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Hillgrove Resources (2 make us uncomfortable!) that you should be aware of before investing here.

Of course Hillgrove 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. 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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