There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should International Tower Hill Mines (TSE:ITH) shareholders be worried about its cash burn? For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let’s start with an examination of the business’s cash, relative to its cash burn.
When Might International Tower Hill Mines Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, International Tower Hill Mines had US$8.3m in cash, and was debt-free. Looking at the last year, the company burnt through US$4.0m. So it had a cash runway of about 2.1 years from June 2019. Arguably, that’s a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Is International Tower Hill Mines’s Cash Burn Changing Over Time?
International Tower Hill Mines didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its 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. As it happens, the company’s cash burn reduced by 6.3% over the last year, which suggests that management are maintaining a fairly steady rate of business development, albeit with a slight decrease in spending. International Tower Hill Mines makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can International Tower Hill Mines Raise More Cash Easily?
While International Tower Hill Mines 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. 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$129m, International Tower Hill Mines’s US$4.0m in cash burn equates to about 4.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
Is International Tower Hill Mines’s Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about International Tower Hill Mines’s cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. On this analysis its cash burn reduction was its weakest feature, but we are not concerned about it. 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. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the International Tower Hill Mines CEO receives in total remuneration.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.