We're Hopeful That Cartier Resources (CVE:ECR) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Cartier Resources (CVE:ECR) 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.

Check out our latest analysis for Cartier Resources

Does Cartier Resources Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2020, Cartier Resources had cash of CA$14m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CA$4.2m. So it had a cash runway of about 3.2 years from September 2020. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.

How Is Cartier Resources' Cash Burn Changing Over Time?

Because Cartier Resources 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. With cash burn dropping by 11% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Admittedly, we're a bit cautious of Cartier Resources 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 Cartier Resources To Raise More Cash For Growth?

While Cartier Resources is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Cartier Resources' cash burn of CA$4.2m is about 7.9% of its CA$54m market capitalisation. 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 Cartier Resources' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Cartier Resources' 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, we conducted an in-depth investigation of the company, and identified 4 warning signs for Cartier Resources (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course Cartier Resources 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. 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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