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

We can readily understand why investors are attracted to unprofitable companies. For example, Benz Mining (CVE:BZ) shareholders have done very well over the last year, with the share price soaring by 1,043%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Benz Mining's cash burn is too risky. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Benz Mining

When Might Benz Mining Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Benz Mining last reported its balance sheet in January 2021, it had zero debt and cash worth CA$17m. Importantly, its cash burn was CA$5.1m over the trailing twelve months. That means it had a cash runway of about 3.3 years as of January 2021. A runway of this length affords the company the time and space it needs to develop the business. 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. 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. Remarkably, it actually increased its cash burn by 552% in the last year. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Benz Mining makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Benz Mining Raise More Cash Easily?

Given its cash burn trajectory, Benz Mining 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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.

Benz Mining has a market capitalisation of CA$77m and burnt through CA$5.1m last year, which is 6.6% of the company's market value. 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.

Is Benz Mining's Cash Burn A Worry?

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. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Benz Mining (2 can't be ignored!) that you should be aware of before investing here.

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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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