Stock Analysis

We're A Little Worried About Standard Uranium's (CVE:STND) Cash Burn Rate

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TSXV:STND
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We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Standard Uranium (CVE:STND) shareholders is whether they should be concerned by its rate of 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' cash, relative to its cash burn.

See our latest analysis for Standard Uranium

How Long Is Standard Uranium's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In October 2021, Standard Uranium had CA$3.9m in cash, and was debt-free. Importantly, its cash burn was CA$7.5m over the trailing twelve months. So it had a cash runway of approximately 6 months from October 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. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
TSXV:STND Debt to Equity History March 1st 2022

How Is Standard Uranium's Cash Burn Changing Over Time?

Because Standard Uranium isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. In fact, it ramped its spending strongly over the last year, increasing cash burn by 114%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Standard 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.

Can Standard Uranium Raise More Cash Easily?

Given its cash burn trajectory, Standard Uranium shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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$27m, Standard Uranium's CA$7.5m in cash burn equates to about 27% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

So, Should We Worry About Standard Uranium's Cash Burn?

Standard Uranium is not in a great position when it comes to its cash burn situation. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its cash runway to be downright troublesome. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Standard Uranium (of which 3 don't sit too well with us!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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