Here's Why We're Not Too Worried About NuLegacy Gold's (CVE:NUG) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, NuLegacy Gold (CVE:NUG) stock is up 129% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for NuLegacy Gold shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for NuLegacy Gold

Does NuLegacy Gold Have A Long Cash Runway?

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. In September 2020, NuLegacy Gold had CA$8.2m in cash, and was debt-free. Looking at the last year, the company burnt through CA$5.3m. Therefore, from September 2020 it had roughly 19 months of cash runway. 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. The image below shows how its cash balance has been changing over the last few years.

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

Because NuLegacy Gold 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. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. NuLegacy Gold 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 Hard Would It Be For NuLegacy Gold To Raise More Cash For Growth?

Since its cash burn is increasing (albeit only slightly), NuLegacy Gold shareholders should still be mindful of the possibility it will require more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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.

NuLegacy Gold's cash burn of CA$5.3m is about 6.8% of its CA$78m market capitalisation. 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 NuLegacy Gold's Cash Burn Situation?

On this analysis of NuLegacy Gold'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 NuLegacy Gold's situation. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for NuLegacy Gold (1 is potentially serious!) that you should be aware of before investing here.

Of course NuLegacy Gold 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.

If you decide to trade NuLegacy Gold, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.