We're Keeping An Eye On Western Copper and Gold's (TSE:WRN) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

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

See our latest analysis for Western Copper and Gold

Does Western Copper and Gold Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2022, Western Copper and Gold had CA$30m in cash, and was debt-free. Looking at the last year, the company burnt through CA$22m. That means it had a cash runway of around 16 months as of September 2022. Importantly, analysts think that Western Copper and Gold will reach cashflow breakeven in 5 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.

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. 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 a very significant 84%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

Can Western Copper and Gold Raise More Cash Easily?

Given its cash burn trajectory, Western Copper and Gold shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Western Copper and Gold has a market capitalisation of CA$343m and burnt through CA$22m last year, which is 6.5% of the company's 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 Western Copper and Gold's Cash Burn A Worry?

On this analysis of Western Copper and Gold's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. One real positive is that analysts are forecasting that the company will reach breakeven. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Taking a deeper dive, we've spotted 4 warning signs for Western Copper and Gold you should be aware of, and 3 of them make us uncomfortable.

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)

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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.