Here's Why We're Not At All Concerned With Sailfish Royalty's (CVE:FISH) Cash Burn Situation

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Sailfish Royalty (CVE:FISH) shareholders be worried about its 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 Sailfish Royalty

When Might Sailfish Royalty Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2022, Sailfish Royalty had US$1.7m in cash, and was debt-free. Looking at the last year, the company burnt through US$361k. Therefore, from September 2022 it had 4.6 years of cash runway. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

How Is Sailfish Royalty's Cash Burn Changing Over Time?

Whilst it's great to see that Sailfish Royalty has already begun generating revenue from operations, last year it only produced US$2.7m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Notably, its cash burn was actually down by 82% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. In reality, this article only makes a short study of the company's growth data. You can take a look at how Sailfish Royalty is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Sailfish Royalty Raise Cash?

While we're comforted by the recent reduction evident from our analysis of Sailfish Royalty's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. 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.

Since it has a market capitalisation of US$62m, Sailfish Royalty's US$361k in cash burn equates to about 0.6% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Sailfish Royalty's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Sailfish Royalty's cash burn. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. On another note, Sailfish Royalty has 4 warning signs (and 2 which are concerning) we think 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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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.