Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should White Rock Minerals (ASX:WRM) 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. Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for White Rock Minerals
How Long Is White Rock Minerals's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2019, White Rock Minerals had cash of AU$1.8m and no debt. Importantly, its cash burn was AU$824k over the trailing twelve months. So it had a cash runway of about 2.1 years from December 2019. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Is White Rock Minerals's Cash Burn Changing Over Time?
While White Rock Minerals did record statutory revenue of AU$776k 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. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 86% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. White Rock Minerals makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can White Rock Minerals Raise Cash?
There's no doubt White Rock Minerals's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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 to 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.
White Rock Minerals has a market capitalisation of AU$9.4m and burnt through AU$824k last year, which is 8.8% of the company's 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.
Is White Rock Minerals's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way White Rock Minerals is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. And even its cash burn relative to its market cap was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Separately, we looked at different risks affecting the company and spotted 5 warning signs for White Rock Minerals (of which 3 are a bit concerning!) you should know about.
Of course White Rock Minerals 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. Thank you for reading.