Kalamazoo Resources (ASX:KZR) Is In A Good Position To Deliver On Growth Plans

We can readily understand why investors are attracted to unprofitable companies. By way of example, Kalamazoo Resources (ASX:KZR) has seen its share price rise 109% 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.

So notwithstanding the buoyant share price, we think it's well worth asking whether Kalamazoo Resources'cash burn is too risky 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Kalamazoo Resources

When Might Kalamazoo Resources 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 Kalamazoo Resources last reported its balance sheet in June 2020, it had zero debt and cash worth AU$8.9m. Looking at the last year, the company burnt through AU$4.5m. That means it had a cash runway of about 2.0 years as of June 2020. 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 Kalamazoo Resources' Cash Burn Changing Over Time?

Kalamazoo Resources 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. Over the last year its cash burn actually increased by a very significant 89%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Kalamazoo Resources makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Kalamazoo Resources Raise Cash?

While Kalamazoo Resources does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Kalamazoo Resources has a market capitalisation of AU$78m and burnt through AU$4.5m last year, which is 5.8% of the company's market value. 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.

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

On this analysis of Kalamazoo Resources' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking an in-depth view of risks, we've identified 2 warning signs for Kalamazoo Resources that you should be aware of before investing.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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. 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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