Here's Why Outcrop Silver & Gold (CVE:OCG) Must Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Outcrop Silver & Gold (CVE:OCG) shareholders be worried about its 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Outcrop Silver & Gold

When Might Outcrop Silver & Gold Run Out Of Money?

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 May 2023, Outcrop Silver & Gold had CA$5.0m in cash, and was debt-free. In the last year, its cash burn was CA$9.9m. Therefore, from May 2023 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. Depicted below, you can see how its cash holdings have changed over time.

How Is Outcrop Silver & Gold's Cash Burn Changing Over Time?

Because Outcrop Silver & 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. It's possible that the 5.1% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Outcrop Silver & 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.

Can Outcrop Silver & Gold Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Outcrop Silver & Gold to raise more 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 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.

Outcrop Silver & Gold has a market capitalisation of CA$45m and burnt through CA$9.9m last year, which is 22% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Outcrop Silver & Gold's Cash Burn Situation?

On this analysis of Outcrop Silver & Gold's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Outcrop Silver & Gold (3 shouldn't be ignored!) 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.