We're Keeping An Eye On Independence Gold's (CVE:IGO) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. 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.

Given this risk, we thought we'd take a look at whether Independence Gold (CVE:IGO) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; 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 Independence Gold

Does Independence Gold Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2024, Independence Gold had cash of CA$3.1m and no debt. In the last year, its cash burn was CA$3.3m. That means it had a cash runway of around 11 months as of March 2024. 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 Is Independence Gold's Cash Burn Changing Over Time?

Independence Gold didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. During the last twelve months, its cash burn actually ramped up 90%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Admittedly, we're a bit cautious of Independence Gold due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Independence Gold Raise More Cash Easily?

Given its cash burn trajectory, Independence Gold shareholders should already be thinking about how easy it might be for it to raise further 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 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.

Independence Gold has a market capitalisation of CA$33m and burnt through CA$3.3m last year, which is 10% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Independence Gold's Cash Burn A Worry?

On this analysis of Independence Gold's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking a deeper dive, we've spotted 6 warning signs for Independence Gold you should be aware of, and 3 of them are potentially serious.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies with significant insider holdings, 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.