We Think Suvo Strategic Minerals (ASX:SUV) Can Easily Afford To Drive Business Growth

Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Suvo Strategic Minerals (ASX:SUV) shareholders should be worried about its cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Suvo Strategic Minerals

How Long Is Suvo Strategic Minerals' 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 2021, Suvo Strategic Minerals had cash of AU$4.4m and no debt. Importantly, its cash burn was AU$599k over the trailing twelve months. So it had a cash runway of about 7.4 years from December 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.

How Is Suvo Strategic Minerals' Cash Burn Changing Over Time?

Whilst it's great to see that Suvo Strategic Minerals has already begun generating revenue from operations, last year it only produced AU$13m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 87% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Suvo Strategic Minerals is building its business over time.

How Easily Can Suvo Strategic Minerals Raise Cash?

There's no doubt Suvo Strategic Minerals' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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.

Suvo Strategic Minerals has a market capitalisation of AU$30m and burnt through AU$599k last year, which is 2.0% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is Suvo Strategic Minerals' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Suvo Strategic Minerals' cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. But it's fair to say that its cash burn relative to its market cap was also very reassuring. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Taking an in-depth view of risks, we've identified 3 warning signs for Suvo Strategic Minerals 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 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.