Here's Why We're Not Too Worried About Colonial Coal International's (CVE:CAD) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Colonial Coal International (CVE:CAD) stock is up 144% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for Colonial Coal International shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Colonial Coal International

When Might Colonial Coal International Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In April 2022, Colonial Coal International had CA$3.5m in cash, and was debt-free. In the last year, its cash burn was CA$1.6m. So it had a cash runway of about 2.2 years from April 2022. Arguably, that's a prudent and sensible length of runway to have. 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. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 13%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 Hard Would It Be For Colonial Coal International To Raise More Cash For Growth?

While Colonial Coal International 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. Commonly, a business will sell new shares in itself to raise cash and drive 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 has a market capitalisation of CA$334m and burnt through CA$1.6m last year, which is 0.5% 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 Colonial Coal International's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Colonial Coal International is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. An in-depth examination of risks revealed 2 warning signs for Colonial Coal International that readers should think about before committing capital to this stock.

Of course Colonial Coal International 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. 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.