Here's Why We're Watching Nevada Exploration's (CVE:NGE) Cash Burn Situation

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Nevada Exploration (CVE:NGE) shareholders be worried about its 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.

Check out our latest analysis for Nevada Exploration

How Long Is Nevada Exploration's 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. In January 2021, Nevada Exploration had CA$2.1m in cash, and was debt-free. Importantly, its cash burn was CA$3.2m over the trailing twelve months. So it had a cash runway of approximately 8 months from January 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Is Nevada Exploration's Cash Burn Changing Over Time?

Because Nevada Exploration 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. As it happens, the company's cash burn reduced by 18% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Nevada Exploration 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.

Can Nevada Exploration Raise More Cash Easily?

While Nevada Exploration is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.

Nevada Exploration has a market capitalisation of CA$26m and burnt through CA$3.2m last year, which is 12% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Nevada Exploration's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Nevada Exploration's cash burn relative to its market cap was relatively promising. Summing up, we think the Nevada Exploration's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Nevada Exploration (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

Of course Nevada Exploration 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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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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