Companies Like Defiance Silver (CVE:DEF) Are In A Position To Invest In Growth

By
Simply Wall St
Published
February 12, 2022
TSXV:DEF
Source: Shutterstock

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Defiance Silver (CVE:DEF) shareholders should be worried about its cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Defiance Silver

Does Defiance Silver Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Defiance Silver last reported its balance sheet in September 2021, it had zero debt and cash worth CA$19m. Looking at the last year, the company burnt through CA$8.4m. Therefore, from September 2021 it had 2.3 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
TSXV:DEF Debt to Equity History February 12th 2022

How Is Defiance Silver's Cash Burn Changing Over Time?

Defiance Silver 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. Its cash burn positively exploded in the last year, up 215%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Defiance Silver 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 Easily Can Defiance Silver Raise Cash?

Given its cash burn trajectory, Defiance Silver shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 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.

Defiance Silver has a market capitalisation of CA$108m and burnt through CA$8.4m last year, which is 7.8% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Defiance Silver's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Defiance Silver's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Defiance Silver's situation. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Defiance Silver (2 are a bit unpleasant!) that you should be aware of before investing here.

Of course Defiance Silver 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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