Stock Analysis

Companies Like IMPACT Silver (CVE:IPT) Are In A Position To Invest In Growth

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TSXV:IPT
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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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, the natural question for IMPACT Silver (CVE:IPT) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

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How Long Is IMPACT Silver's 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 June 2022, IMPACT Silver had cash of CA$19m and no debt. In the last year, its cash burn was CA$4.9m. So it had a cash runway of about 3.8 years from June 2022. There's no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
TSXV:IPT Debt to Equity History November 14th 2022

Is IMPACT Silver's Revenue Growing?

Given that IMPACT Silver actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 14%. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how IMPACT Silver is building its business over time.

Can IMPACT Silver Raise More Cash Easily?

Given its problematic fall in revenue, IMPACT Silver shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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.

Since it has a market capitalisation of CA$52m, IMPACT Silver's CA$4.9m in cash burn equates to about 9.4% of its market value. 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 IMPACT Silver's Cash Burn?

As you can probably tell by now, we're not too worried about IMPACT Silver's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for IMPACT Silver that potential shareholders should take into account before putting money into a stock.

Of course IMPACT Silver 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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