Will Kiplin Metals (CVE:KIP) Spend Its Cash Wisely?

By
Simply Wall St
Published
December 04, 2021
TSXV:KIP
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. For example, Kiplin Metals (CVE:KIP) shareholders have done very well over the last year, with the share price soaring by 1,060%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Kiplin Metals' cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for Kiplin Metals

How Long Is Kiplin Metals' 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. When Kiplin Metals last reported its balance sheet in September 2021, it had zero debt and cash worth CA$279k. Looking at the last year, the company burnt through CA$350k. That means it had a cash runway of around 10 months as of September 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
TSXV:KIP Debt to Equity History December 5th 2021

How Is Kiplin Metals' Cash Burn Changing Over Time?

Kiplin Metals 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. With the cash burn rate up 46% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Kiplin Metals makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Kiplin Metals Raise Cash?

Since its cash burn is moving in the wrong direction, Kiplin Metals shareholders may wish to think ahead to when the company may need to raise 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 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$28m, Kiplin Metals' CA$350k in cash burn equates to about 1.3% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Kiplin Metals' Cash Burn?

On this analysis of Kiplin Metals' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Kiplin Metals (of which 2 are a bit concerning!) you should know about.

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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