We're Hopeful That Regulus Resources (CVE:REG) Will Use Its Cash Wisely

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Regulus Resources (CVE:REG) 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'.

View our latest analysis for Regulus Resources

Does Regulus Resources Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2020, Regulus Resources had cash of CA$16m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CA$8.2m. So it had a cash runway of approximately 23 months from December 2020. 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. Depicted below, you can see how its cash holdings have changed over time.

How Is Regulus Resources' Cash Burn Changing Over Time?

Regulus Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Even though it doesn't get us excited, the 52% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Admittedly, we're a bit cautious of Regulus Resources 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 Hard Would It Be For Regulus Resources To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Regulus Resources' 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. 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.

Regulus Resources' cash burn of CA$8.2m is about 9.9% of its CA$84m 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.

So, Should We Worry About Regulus Resources' Cash Burn?

As you can probably tell by now, we're not too worried about Regulus Resources' cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. And even though its cash runway wasn't quite as impressive, it was still a positive. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Regulus Resources that potential shareholders should take into account before putting money into a stock.

Of course Regulus Resources 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.

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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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