Just because a business does not make any money, does not mean that the stock will go down. By way of example, Colonial Coal International (CVE:CAD) has seen its share price rise 346% over the last year, delighting many shareholders. 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 Colonial Coal International's cash burn is too risky. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Colonial Coal International Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at April 2021, Colonial Coal International had cash of CA$5.2m and no debt. Importantly, its cash burn was CA$1.4m over the trailing twelve months. That means it had a cash runway of about 3.8 years as of April 2021. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Is Colonial Coal International's Cash Burn Changing Over Time?
Colonial Coal International 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 21% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Colonial Coal International 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 Easily Can Colonial Coal International Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Colonial Coal International to raise more cash in the future. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Colonial Coal International's cash burn of CA$1.4m is about 0.2% of its CA$595m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Colonial Coal International's Cash Burn Situation?
As you can probably tell by now, we're not too worried about Colonial Coal International's cash burn. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn reduction, but even that wasn't too bad! 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, Colonial Coal International has 3 warning signs (and 2 which are significant) we think you should know about.
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)
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.
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