We're Not Very Worried About Defiance Silver's (CVE:DEF) Cash Burn Rate

By
Simply Wall St
Published
October 29, 2021
TSXV:DEF
Source: Shutterstock

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

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 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 Defiance Silver

When Might Defiance Silver Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2021, Defiance Silver had cash of CA$21m and no debt. Looking at the last year, the company burnt through CA$7.8m. That means it had a cash runway of about 2.7 years as of June 2021. That's decent, giving the company a couple years to develop its business. 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 October 30th 2021

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. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The skyrocketing cash burn up 165% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. 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.

Can Defiance Silver Raise More Cash Easily?

Given its cash burn trajectory, Defiance Silver shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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's cash burn of CA$7.8m is about 4.9% of its CA$159m market capitalisation. 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 Defiance Silver's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Defiance Silver 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. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Defiance Silver (of which 2 are potentially serious!) 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)

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