We're Not Very Worried About Golden Tag Resources' (CVE:GOG) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Golden Tag Resources (CVE:GOG) shareholders have done very well over the last year, with the share price soaring by 856%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So notwithstanding the buoyant share price, we think it's well worth asking whether Golden Tag 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Golden Tag Resources

How Long Is Golden Tag Resources' Cash Runway?

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 September 2020, Golden Tag Resources had cash of CA$9.2m and no debt. In the last year, its cash burn was CA$968k. That means it had a cash runway of about 9.5 years as of September 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

How Is Golden Tag Resources' Cash Burn Changing Over Time?

Because Golden Tag 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. Remarkably, it actually increased its cash burn by 258% in the last year. That kind of sharp increase in spending may pay off, but is generally considered quite risky. Golden Tag Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Golden Tag Resources Raise More Cash Easily?

Given its cash burn trajectory, Golden Tag Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Golden Tag Resources' cash burn of CA$968k is about 1.3% of its CA$73m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Golden Tag Resources' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Golden Tag Resources' cash burn. 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. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Taking a deeper dive, we've spotted 3 warning signs for Golden Tag Resources you should be aware of, and 1 of them is a bit concerning.

Of course Golden Tag 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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