Just because a business does not make any money, does not mean that the stock will go down. Indeed, CanAlaska Uranium (CVE:CVV) stock is up 182% in the last year, providing strong gains for shareholders. 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 notwithstanding the buoyant share price, we think it's well worth asking whether CanAlaska Uranium's cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
View our latest analysis for CanAlaska Uranium
Does CanAlaska Uranium Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When CanAlaska Uranium last reported its balance sheet in April 2021, it had zero debt and cash worth CA$7.7m. Importantly, its cash burn was CA$2.3m over the trailing twelve months. So it had a cash runway of about 3.3 years from April 2021. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
How Is CanAlaska Uranium's Cash Burn Changing Over Time?
CanAlaska Uranium didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 44% over the last year suggests some degree of prudence. CanAlaska Uranium 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 Hard Would It Be For CanAlaska Uranium To Raise More Cash For Growth?
While CanAlaska Uranium is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Since it has a market capitalisation of CA$40m, CanAlaska Uranium's CA$2.3m in cash burn equates to about 5.8% of its 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.
How Risky Is CanAlaska Uranium's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way CanAlaska Uranium is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for CanAlaska Uranium (1 is a bit concerning!) that you should be aware of before investing here.
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. 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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