Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Gensource Potash (CVE:GSP) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Gensource Potash 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. As at June 2021, Gensource Potash had cash of CA$2.7m and no debt. Looking at the last year, the company burnt through CA$5.0m. So it had a cash runway of approximately 6 months from June 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Easily Can Gensource Potash Raise Cash?
Companies can raise capital through either debt or equity. 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.
Gensource Potash's cash burn of CA$5.0m is about 4.9% of its CA$102m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Gensource Potash's Cash Burn?
Given it's an early stage company, we don't have a lot of data with which to judge Gensource Potash's cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. Having said that, we can say that its cash burn relative to its market cap was a real positive. To us, there is clearly a substantial risk that that the company will have to raise costly funding, making it very hard to quantify the potential upside. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Gensource Potash (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.
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