Here's Why We're Watching Manganese X Energy's (CVE:MN) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Manganese X Energy (CVE:MN) shareholders have done very well over the last year, with the share price soaring by 140%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Manganese X Energy shareholders to consider whether its cash burn is concerning. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Manganese X Energy

When Might Manganese X Energy Run Out Of Money?

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. When Manganese X Energy last reported its balance sheet in March 2021, it had zero debt and cash worth CA$5.6m. Looking at the last year, the company burnt through CA$2.9m. So it had a cash runway of approximately 23 months from March 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Is Manganese X Energy's Cash Burn Changing Over Time?

Because Manganese X Energy isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Its cash burn positively exploded in the last year, up 206%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Manganese X Energy makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Manganese X Energy Raise Cash?

Given its cash burn trajectory, Manganese X Energy shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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$30m, Manganese X Energy's CA$2.9m in cash burn equates to about 9.7% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is Manganese X Energy's Cash Burn Situation?

On this analysis of Manganese X Energy'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. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Manganese X Energy's situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Manganese X Energy (of which 2 are concerning!) you should know about.

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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This article by Simply Wall St is general in nature. 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.
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