We're Not Very Worried About SIR Royalty Income Fund's (TSE:SRV.UN) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, SIR Royalty Income Fund (TSE:SRV.UN) has seen its share price rise 211% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky SIR Royalty Income Fund's cash burn is. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for SIR Royalty Income Fund

How Long Is SIR Royalty Income Fund's 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 March 2021, SIR Royalty Income Fund had cash of CA$139k and no debt. Looking at the last year, the company burnt through CA$166k. That means it had a cash runway of around 10 months as of March 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

Can SIR Royalty Income Fund Raise More Cash Easily?

Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of CA$97m, SIR Royalty Income Fund's CA$166k in cash burn equates to about 0.2% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is SIR Royalty Income Fund's Cash Burn Situation?

Because SIR Royalty Income Fund 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. While cash burning companies are always comparatively risky, we think its cash burn situation seems ok, on balance. Separately, we looked at different risks affecting the company and spotted 5 warning signs for SIR Royalty Income Fund (of which 2 don't sit too well with us!) you should know about.

Of course SIR Royalty Income Fund 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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