We're Not Worried About Pure Energy Minerals' (CVE:PE) Cash Burn

We can readily understand why investors are attracted to unprofitable companies. Indeed, Pure Energy Minerals (CVE:PE) stock is up 359% in the last year, providing strong gains for 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

Does Pure Energy Minerals Have A Long Cash Runway?

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. When Pure Energy Minerals last reported its balance sheet in March 2021, it had zero debt and cash worth CA$417k. Importantly, its cash burn was CA$200k over the trailing twelve months. So it had a cash runway of about 2.1 years from March 2021. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

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

Whilst it's great to see that Pure Energy Minerals has already begun generating revenue from operations, last year it only produced CA$130k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Notably, its cash burn was actually down by 84% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Admittedly, we're a bit cautious of Pure Energy Minerals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Pure Energy Minerals Raise Cash?

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. 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. 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.

Since it has a market capitalisation of CA$41m, Pure Energy Minerals' CA$200k in cash burn equates to about 0.5% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About Pure Energy Minerals' Cash Burn?

As you can probably tell by now, we're not too worried about Pure Energy Minerals' cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. And even its cash runway was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Pure Energy Minerals (of which 1 can't be ignored!) 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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