Pure Energy Minerals (CVE:PE) Is In A Good Position To Deliver On Growth Plans

We can readily understand why investors are attracted to unprofitable companies. By way of example, Pure Energy Minerals (CVE:PE) has seen its share price rise 537% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for Pure Energy Minerals shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Pure Energy Minerals

When Might Pure Energy Minerals 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. As at September 2020, Pure Energy Minerals had cash of CA$215k and no debt. In the last year, its cash burn was CA$154k. That means it had a cash runway of around 17 months as of September 2020. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Is Pure Energy Minerals' Cash Burn Changing Over Time?

Pure Energy Minerals didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 92% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Pure Energy Minerals 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 Pure Energy Minerals Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of Pure Energy Minerals' cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Pure Energy Minerals' cash burn of CA$154k is about 0.3% of its CA$56m market capitalisation. 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.

How Risky Is Pure Energy Minerals' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Pure Energy Minerals is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. On this analysis its cash runway was its weakest feature, but we are not concerned about it. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Pure Energy Minerals (of which 1 is 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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