Here's Why We're Not Too Worried About Winsome Resources' (ASX:WR1) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Winsome Resources (ASX:WR1) shareholders have done very well over the last year, with the share price soaring by 382%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Winsome Resources shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Winsome Resources

How Long Is Winsome Resources' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2022, Winsome Resources had AU$10m in cash, and was debt-free. Importantly, its cash burn was AU$10m over the trailing twelve months. That means it had a cash runway of around 12 months as of December 2022. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Hard Would It Be For Winsome Resources To Raise More Cash For Growth?

Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of AU$341m, Winsome Resources' AU$10m in cash burn equates to about 2.9% 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.

Is Winsome Resources' Cash Burn A Worry?

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. Having said that, we can say that its cash burn relative to its market cap was a real positive. To be frank most cash burning companies are relatively risky, but this one seems safer than most, in our view. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Winsome Resources (of which 2 are concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.