Southern Cross Gold (ASX:SXG) Is In A Good Position To Deliver On Growth Plans

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Southern Cross Gold (ASX:SXG) shareholders be worried about its 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Southern Cross Gold

SWOT Analysis for Southern Cross Gold

When Might Southern Cross Gold 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. In November 2022, Southern Cross Gold had AU$18m in cash, and was debt-free. Importantly, its cash burn was AU$7.5m over the trailing twelve months. That means it had a cash runway of about 2.4 years as of November 2022. 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 a lot longer. You can see how its cash balance has changed over time in the image below.

How Easily Can Southern Cross Gold Raise Cash?

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).

Southern Cross Gold's cash burn of AU$7.5m is about 8.9% of its AU$84m 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.

Is Southern Cross Gold's Cash Burn A Worry?

Given it's an early stage company, we don't have a lot of data with which to judge Southern Cross Gold's cash burn. Having said that, we can say that its cash runway was a real positive. In conclusion, we don't see why investors should be concerned with its cash burn, at least for some time. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Southern Cross Gold (of which 1 is potentially serious!) you should know about.

Of course Southern Cross Gold 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.