Stock Analysis

We're Not Very Worried About Tungsten Mining's (ASX:TGN) Cash Burn Rate

ASX:TGN
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We can readily understand why investors are attracted to unprofitable companies. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Tungsten Mining (ASX:TGN) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Tungsten Mining

When Might Tungsten Mining Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Tungsten Mining last reported its balance sheet in December 2020, it had zero debt and cash worth AU$21m. Looking at the last year, the company burnt through AU$7.2m. So it had a cash runway of about 2.8 years from December 2020. 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.

debt-equity-history-analysis
ASX:TGN Debt to Equity History June 3rd 2021

How Is Tungsten Mining's Cash Burn Changing Over Time?

While Tungsten Mining did record statutory revenue of AU$186k over the last year, it didn't have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. Even though it doesn't get us excited, the 33% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Tungsten Mining 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 Tungsten Mining To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Tungsten Mining to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

Since it has a market capitalisation of AU$98m, Tungsten Mining's AU$7.2m in cash burn equates to about 7.4% 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 Tungsten Mining's Cash Burn?

As you can probably tell by now, we're not too worried about Tungsten Mining's cash burn. For example, we think its cash runway suggests that the company is on a good path. Its cash burn reduction wasn't quite as good, but was still rather encouraging! 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. On another note, Tungsten Mining has 5 warning signs (and 2 which don't sit too well with us) we think you should know about.

Of course Tungsten Mining 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. 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.
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