There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 Aztec Minerals (CVE:AZT) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Does Aztec Minerals Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Aztec Minerals had CA$171k in cash, and was debt-free. Looking at the last year, the company burnt through CA$1.3m. That means it had a cash runway of around 2 months as of September 2019. It’s extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is Aztec Minerals’s Cash Burn Changing Over Time?
Aztec Minerals 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. Given the length of the cash runway, we’d interpret the 46% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we’re a bit cautious of Aztec Minerals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For Aztec Minerals 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 Aztec Minerals to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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$2.1m, Aztec Minerals’s CA$1.3m in cash burn equates to about 60% of its market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we’d be very wary of a painful capital raising.
How Risky Is Aztec Minerals’s Cash Burn Situation?
As you can probably tell by now, we’re rather concerned about Aztec Minerals’s cash burn. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. The measures we’ve considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. Notably, our data indicates that Aztec Minerals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
If you spot an error that warrants correction, please contact the editor at email@example.com. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.