We're Not Very Worried About Winsome Resources' (ASX:WR1) Cash Burn Rate

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 415% 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. 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.

View our latest analysis for Winsome Resources

Does Winsome Resources Have A Long Cash Runway?

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 December 2022, Winsome Resources had AU$10m in cash, and was debt-free. In the last year, its cash burn was AU$10m. Therefore, from December 2022 it had roughly 12 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

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

Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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$287m, Winsome Resources' AU$10m in cash burn equates to about 3.5% of its 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 Winsome Resources' Cash Burn?

Because Winsome Resources is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. We would undoubtedly be more comfortable if it had reported some 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. Taking a deeper dive, we've spotted 4 warning signs for Winsome Resources you should be aware of, and 2 of them are a bit unpleasant.

Of course Winsome Resources 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.