We're Not Very Worried About Fosterville South Exploration's (CVE:FSX) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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 should Fosterville South Exploration (CVE:FSX) shareholders 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 Fosterville South Exploration

Does Fosterville South Exploration Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In March 2022, Fosterville South Exploration had CA$20m in cash, and was debt-free. Importantly, its cash burn was CA$8.1m over the trailing twelve months. Therefore, from March 2022 it had 2.5 years of cash runway. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.

How Is Fosterville South Exploration's Cash Burn Changing Over Time?

Because Fosterville South Exploration 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. Even though it doesn't get us excited, the 22% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of Fosterville South Exploration 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 Easily Can Fosterville South Exploration Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Fosterville South Exploration to raise more cash in the future. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of CA$31m, Fosterville South Exploration's CA$8.1m in cash burn equates to about 26% of its market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Fosterville South Exploration's Cash Burn Situation?

On this analysis of Fosterville South Exploration's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Fosterville South Exploration has 4 warning signs (and 1 which doesn't sit too well with us) we think 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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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.