Just because a business does not make any money, does not mean that the stock will go down. For example, Investigator Resources (ASX:IVR) shareholders have done very well over the last year, with the share price soaring by 600%. 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 Investigator Resources 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Investigator Resources' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, Investigator Resources had AU$14m in cash, and was debt-free. Looking at the last year, the company burnt through AU$4.7m. That means it had a cash runway of about 2.9 years as of December 2020. That's decent, giving the company a couple years to develop its business. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. Depicted below, you can see how its cash holdings have changed over time.
How Is Investigator Resources' Cash Burn Changing Over Time?
In our view, Investigator Resources doesn't yet produce significant amounts of operating revenue, since it reported just AU$70k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. In fact, it ramped its spending strongly over the last year, increasing cash burn by 179%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Investigator Resources 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.
Can Investigator Resources Raise More Cash Easily?
Given its cash burn trajectory, Investigator Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. 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.
Investigator Resources' cash burn of AU$4.7m is about 4.2% of its AU$111m market capitalisation. 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 Investigator Resources' Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Investigator Resources is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Investigator Resources has 5 warning signs (and 3 which are potentially serious) we think you should know about.
Of course Investigator 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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