Armor Minerals (CVE:A) Is In A Good Position To Deliver On Growth Plans

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Armor Minerals (CVE:A) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Armor Minerals

How Long Is Armor Minerals' 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. Armor Minerals has such a small amount of debt that we'll set it aside, and focus on the CA$1.6m in cash it held at June 2020. Importantly, its cash burn was CA$265k over the trailing twelve months. That means it had a cash runway of about 6.2 years as of June 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Is Armor Minerals' Cash Burn Changing Over Time?

Because Armor Minerals isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. In fact, it ramped its spending strongly over the last year, increasing cash burn by 125%. That sort of ramp in expenditure is no doubt intended to generate worthwhile long term returns. Armor Minerals 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 Armor Minerals Raise More Cash Easily?

While Armor Minerals does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Armor Minerals has a market capitalisation of CA$42m and burnt through CA$265k last year, which is 0.6% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Armor Minerals' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Armor Minerals is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Armor Minerals (3 can't be ignored!) that you should be aware of before investing here.

Of course Armor Minerals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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. 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.
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