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, the natural question for QMC Quantum Minerals (CVE:QMC) shareholders is whether they should be concerned by its rate of 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Does QMC Quantum Minerals Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at May 2019, QMC Quantum Minerals had cash of CA$322k and no debt. In the last year, its cash burn was CA$2.4m. Therefore, from May 2019 it had roughly 2 months of cash runway. It’s extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.
How Is QMC Quantum Minerals’s Cash Burn Changing Over Time?
Because QMC Quantum Minerals 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 6.9% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. QMC Quantum Minerals 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.
How Easily Can QMC Quantum Minerals Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for QMC Quantum Minerals to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of CA$9.2m, QMC Quantum Minerals’s CA$2.4m in cash burn equates to about 26% of its market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
So, Should We Worry About QMC Quantum Minerals’s Cash Burn?
As you can probably tell by now, we’re rather concerned about QMC Quantum Minerals’s cash burn. In particular, we think its cash runway suggests it isn’t in a good position to keep funding growth. While not as bad as its cash runway, its cash burn reduction is also a concern, and considering everything mentioned above, we’re struggling to find much to be optimistic about. Once we consider the metrics mentioned in this article together, we’re left with very little confidence in the company’s ability to manage its cash burn, and we think it will probably need more money. Notably, our data indicates that QMC Quantum Minerals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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