Zenith Minerals (ASX:ZNC) Is In A Good Position To Deliver On Growth Plans

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, Zenith Minerals (ASX:ZNC) shareholders have done very well over the last year, with the share price soaring by 206%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Zenith Minerals' 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'. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Zenith Minerals

When Might Zenith Minerals Run Out Of Money?

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 December 2020, Zenith Minerals had cash of AU$4.4m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$2.5m. Therefore, from December 2020 it had roughly 21 months of cash runway. 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. You can see how its cash balance has changed over time in the image below.

How Is Zenith Minerals' Cash Burn Changing Over Time?

In our view, Zenith Minerals doesn't yet produce significant amounts of operating revenue, since it reported just AU$258k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With the cash burn rate up 49% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Zenith 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 Zenith Minerals Raise Cash?

While Zenith Minerals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Zenith Minerals has a market capitalisation of AU$77m and burnt through AU$2.5m last year, which is 3.3% 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 Zenith Minerals' Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Zenith Minerals' cash burn relative to its market cap was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. On another note, Zenith Minerals has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course Zenith 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.
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