We can readily understand why investors are attracted to unprofitable companies. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Nighthawk Gold (TSE:NHK) shareholders be worried about its cash burn? 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Nighthawk Gold's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Nighthawk Gold had CA$12m in cash, and was debt-free. In the last year, its cash burn was CA$17m. That means it had a cash runway of around 8 months as of September 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Nighthawk Gold's Cash Burn Changing Over Time?
Because Nighthawk Gold 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. Over the last year its cash burn actually increased by 22%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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.
Can Nighthawk Gold Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, Nighthawk Gold shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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).
Nighthawk Gold's cash burn of CA$17m is about 18% of its CA$95m market capitalisation. 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 Nighthawk Gold's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Nighthawk Gold's cash burn relative to its market cap was relatively promising. Summing up, we think the Nighthawk Gold's cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that Nighthawk Gold insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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.
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.
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