Here's Why We're Watching Gabriel Resources' (CVE:GBU) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. By way of example, Gabriel Resources (CVE:GBU) has seen its share price rise 113% over the last year, delighting many shareholders. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So notwithstanding the buoyant share price, we think it's well worth asking whether Gabriel Resources' cash burn is too risky. 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.

View our latest analysis for Gabriel Resources

How Long Is Gabriel Resources' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Gabriel Resources last reported its balance sheet in September 2023, it had zero debt and cash worth CA$4.6m. Looking at the last year, the company burnt through CA$9.0m. Therefore, from September 2023 it had roughly 6 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

How Is Gabriel Resources' Cash Burn Changing Over Time?

Because Gabriel Resources 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. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Gabriel Resources 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 Gabriel Resources Raise More Cash Easily?

Since its cash burn is increasing (albeit only slightly), Gabriel Resources shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Gabriel Resources has a market capitalisation of CA$416m and burnt through CA$9.0m last year, which is 2.2% of the company's 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 Gabriel Resources' Cash Burn Situation?

On this analysis of Gabriel Resources' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Summing up, we think the Gabriel Resources' cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 4 warning signs for Gabriel Resources you should be aware of, and 3 of them shouldn't be ignored.

Of course Gabriel 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. 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.