We Think Defiance Silver (CVE:DEF) Needs To Drive Business Growth Carefully

Published
June 01, 2022
TSXV:DEF
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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Defiance Silver (CVE:DEF) shareholders is whether they should be concerned by its rate of cash burn. 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). Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Defiance Silver

How Long Is Defiance Silver's 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 March 2022, it had zero debt and cash worth CA$14m. Looking at the last year, the company burnt through CA$10.0m. That means it had a cash runway of around 16 months as of March 2022. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
TSXV:DEF Debt to Equity History June 1st 2022

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

Because Defiance Silver 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. Over the last year its cash burn actually increased by a very significant 81%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Admittedly, we're a bit cautious of Defiance Silver due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Defiance Silver Raise More Cash Easily?

While Defiance Silver 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.

Defiance Silver has a market capitalisation of CA$85m and burnt through CA$10.0m last year, which is 12% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Defiance Silver's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Defiance Silver's cash burn relative to its market cap was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Defiance Silver (of which 2 are concerning!) you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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About TSXV:DEF

Defiance Silver

Defiance Silver Corp., an exploration stage company, engages in the acquisition, exploration, evaluation, and development of mineral properties primarily in Mexico.

Flawless balance sheet with weak fundamentals.