Here's Why We're Not Too Worried About Western Copper and Gold's (TSE:WRN) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Western Copper and Gold (TSE:WRN) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Western Copper and Gold

When Might Western Copper and Gold Run Out Of Money?

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. As at June 2024, Western Copper and Gold had cash of CA$78m and no debt. Looking at the last year, the company burnt through CA$22m. That means it had a cash runway of about 3.6 years as of June 2024. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.

How Is Western Copper and Gold's Cash Burn Changing Over Time?

Western Copper and Gold didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With cash burn dropping by 14% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. 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 Hard Would It Be For Western Copper and Gold To Raise More Cash For Growth?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Western Copper and Gold to raise more cash in the future. 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. 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.

Western Copper and Gold's cash burn of CA$22m is about 6.8% of its CA$317m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Western Copper and Gold's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Western Copper and Gold is burning through its cash. For example, we think its cash runway 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. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. On another note, Western Copper and Gold has 4 warning signs (and 2 which are concerning) we think you should know about.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.