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.
So, the natural question for Jayden Resources (CVE:JDN) shareholders is whether they should be concerned by its rate of 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’s cash, relative to its cash burn.
Does Jayden Resources Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Jayden Resources had CA$102k in cash, and was debt-free. In the last year, its cash burn was CA$25k. That means it had a cash runway of about 4.0 years as of September 2019. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
How Is Jayden Resources’s Cash Burn Changing Over Time?
Because Jayden 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. From a cash flow perspective, it’s great to see the company’s cash burn dropped by 98% over the last year. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we’re a bit cautious of Jayden Resources due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Jayden Resources To Raise More Cash For Growth?
There’s no doubt Jayden Resources’s rapidly reducing cash burn brings comfort, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Jayden Resources’s cash burn of CA$25k is about 1.9% of its CA$1.4m market capitalisation. 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 Jayden Resources’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Jayden Resources’s cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. But it’s fair to say that its cash burn relative to its market cap was also very reassuring. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Jayden Resources’s CEO gets paid each year.
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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