We're Not Very Worried About Mount Ridley Mines' (ASX:MRD) Cash Burn Rate

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Mount Ridley Mines (ASX:MRD) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Mount Ridley Mines

How Long Is Mount Ridley Mines' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Mount Ridley Mines last reported its balance sheet in December 2021, it had zero debt and cash worth AU$6.4m. In the last year, its cash burn was AU$2.5m. That means it had a cash runway of about 2.6 years as of December 2021. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

How Is Mount Ridley Mines' Cash Burn Changing Over Time?

In our view, Mount Ridley Mines doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.4k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The skyrocketing cash burn up 137% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Mount Ridley Mines 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 Hard Would It Be For Mount Ridley Mines To Raise More Cash For Growth?

Given its cash burn trajectory, Mount Ridley Mines 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. Many companies end up issuing new shares to fund future 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.

Since it has a market capitalisation of AU$32m, Mount Ridley Mines' AU$2.5m in cash burn equates to about 7.7% of its 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 Mount Ridley Mines' Cash Burn?

On this analysis of Mount Ridley Mines' cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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, we conducted an in-depth investigation of the company, and identified 4 warning signs for Mount Ridley Mines (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course Mount Ridley Mines 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.