We're A Little Worried About Nighthawk Gold's (TSE:NHK) Cash Burn Rate

By
Simply Wall St
Published
November 20, 2021
TSX:NHK
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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? 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Nighthawk Gold

Does Nighthawk Gold 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 Nighthawk Gold last reported its balance sheet in September 2021, it had zero debt and cash worth CA$17m. Looking at the last year, the company burnt through CA$31m. So it had a cash runway of approximately 7 months from September 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. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
TSX:NHK Debt to Equity History November 21st 2021

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. In fact, it ramped its spending strongly over the last year, increasing cash burn by 182%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. While the past is always worth studying, it is the future that matters most of all. 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. 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$76m, Nighthawk Gold's CA$31m in cash burn equates to about 40% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

How Risky Is Nighthawk Gold's Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Nighthawk Gold's cash burn. In particular, we think its increasing cash burn suggests it isn't in a good position to keep funding growth. While not as bad as its increasing cash burn, its cash burn relative to its market cap is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. 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 Nighthawk Gold (of which 4 shouldn't be ignored!) you should know about.

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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