Stock Analysis

Here's Why We're A Bit Worried About Japan Gold's (CVE:JG) Cash Burn Situation

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TSXV:JG
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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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Japan Gold (CVE:JG) 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' cash, relative to its cash burn.

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How Long Is Japan Gold's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In September 2022, Japan Gold had CA$4.9m in cash, and was debt-free. Looking at the last year, the company burnt through CA$9.3m. Therefore, from September 2022 it had roughly 6 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
TSXV:JG Debt to Equity History March 16th 2023

How Is Japan Gold's Cash Burn Changing Over Time?

Because Japan Gold 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. During the last twelve months, its cash burn actually ramped up 69%. 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 Japan Gold 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 Easily Can Japan Gold Raise Cash?

Given its cash burn trajectory, Japan 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. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of CA$50m, Japan Gold's CA$9.3m in cash burn equates to about 19% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Japan Gold's Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Japan Gold's cash burn relative to its market cap was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Japan Gold (2 are potentially serious!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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