Is Gold Standard Ventures (TSE:GSV) In A Good Position To Deliver On Growth Plans?

By
Simply Wall St
Published
December 21, 2021
TSX:GSV
Source: Shutterstock

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Gold Standard Ventures (TSE:GSV) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Gold Standard Ventures

Does Gold Standard Ventures Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Gold Standard Ventures last reported its balance sheet in September 2021, it had zero debt and cash worth CA$27m. Looking at the last year, the company burnt through CA$35m. So it had a cash runway of approximately 9 months from September 2021. Notably, analysts forecast that Gold Standard Ventures will break even (at a free cash flow level) in about 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
TSX:GSV Debt to Equity History December 21st 2021

How Is Gold Standard Ventures' Cash Burn Changing Over Time?

Because Gold Standard Ventures 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. With the cash burn rate up 47% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Gold Standard Ventures Raise Cash?

Given its cash burn trajectory, Gold Standard Ventures shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of CA$204m, Gold Standard Ventures' CA$35m in cash burn equates to about 17% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Gold Standard Ventures' Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Gold Standard Ventures' cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Summing up, we think the Gold Standard Ventures' cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Gold Standard Ventures (2 are significant!) that you should be aware of before investing here.

Of course Gold Standard Ventures 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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