Here's Why We're Not Too Worried About Benz Mining's (CVE:BZ) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, Benz Mining (CVE:BZ) shareholders have done very well over the last year, with the share price soaring by 1,333%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Benz Mining'scash burn is too risky 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Benz Mining

How Long Is Benz Mining's 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. In October 2020, Benz Mining had CA$17m in cash, and was debt-free. In the last year, its cash burn was CA$2.9m. So it had a cash runway of about 5.9 years from October 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. You can see how its cash balance has changed over time in the image below.

How Is Benz Mining's Cash Burn Changing Over Time?

Because Benz Mining 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. Its cash burn positively exploded in the last year, up 297%. We certainly hope for shareholders' sake that the money is well spent, because that kind of expenditure increase always makes us nervous. Benz Mining 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.

How Hard Would It Be For Benz Mining To Raise More Cash For Growth?

While Benz Mining 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Benz Mining's cash burn of CA$2.9m is about 3.8% of its CA$78m 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 Benz Mining's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Benz Mining 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. 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, we conducted an in-depth investigation of the company, and identified 4 warning signs for Benz Mining (2 are potentially serious!) that you should be aware of before investing here.

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)

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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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