We Think Mandrake Resources (ASX:MAN) Can Easily Afford To Drive Business Growth

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Mandrake Resources (ASX:MAN) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Mandrake Resources

SWOT Analysis for Mandrake Resources

When Might Mandrake Resources Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, Mandrake Resources had AU$17m in cash, and was debt-free. In the last year, its cash burn was AU$1.2m. So it had a very long cash runway of many years from December 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Is Mandrake Resources' Cash Burn Changing Over Time?

Because Mandrake Resources isn't currently generating revenue, we consider it an early-stage 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 21% over the last year suggests some degree of prudence. Mandrake 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 Mandrake Resources Raise More Cash Easily?

While Mandrake Resources is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).

Mandrake Resources has a market capitalisation of AU$31m and burnt through AU$1.2m last year, which is 3.9% of the company's market value. 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 Mandrake Resources' Cash Burn?

As you can probably tell by now, we're not too worried about Mandrake Resources' cash burn. For example, we think its cash runway suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, Mandrake Resources has 5 warning signs (and 2 which are significant) we think you should know about.

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