We Think Southern Cross Gold (ASX:SXG) Can 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 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Southern Cross Gold (ASX:SXG) shareholders is whether they should be concerned by its rate of 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.

See our latest analysis for Southern Cross Gold

When Might Southern Cross Gold Run Out Of Money?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Southern Cross Gold last reported its balance sheet in November 2022, it had zero debt and cash worth AU$18m. 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.

Can Southern Cross Gold Raise More Cash Easily?

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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Southern Cross Gold has a market capitalisation of AU$121m and burnt through AU$7.5m last year, which is 6.2% 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 Southern Cross Gold's Cash Burn?

Because Southern Cross Gold is an early stage company, we don't have a great deal of data on which to form an opinion of its 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. Taking a deeper dive, we've spotted 4 warning signs for Southern Cross Gold you should be aware of, and 1 of them is significant.

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.