Companies Like Winsome Resources (ASX:WR1) Can Afford To Invest In Growth

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Winsome Resources (ASX:WR1) has seen its share price rise 399% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

In light of its strong share price run, we think now is a good time to investigate how risky Winsome Resources' cash burn is. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Winsome Resources

Does Winsome Resources Have A Long 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 June 2022, Winsome Resources had cash of AU$13m and no debt. Looking at the last year, the company burnt through AU$3.6m. That means it had a cash runway of about 3.8 years as of June 2022. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

How Easily Can Winsome Resources Raise Cash?

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. 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$323m, Winsome Resources' AU$3.6m in cash burn equates to about 1.1% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Winsome Resources' Cash Burn Situation?

Given it's an early stage company, we don't have a lot of data with which to judge Winsome Resources' cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash runway gave us comfort. Summing up, its cash burn doesn't bother us and we're excited to see what kind of growth it can achieve with its current cash hoard. On another note, Winsome Resources has 4 warning signs (and 2 which are a bit unpleasant) we think you should know about.

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.