Will Silver One Resources (CVE:SVE) Spend Its Cash Wisely?

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, 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Silver One Resources (CVE:SVE) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called 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 Silver One Resources

When Might Silver One Resources Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2023, Silver One Resources had cash of CA$2.2m and no debt. Looking at the last year, the company burnt through CA$3.6m. So it had a cash runway of approximately 7 months from September 2023. 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. You can see how its cash balance has changed over time in the image below.

How Is Silver One Resources' Cash Burn Changing Over Time?

Silver One Resources 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. As it happens, the company's cash burn reduced by 51% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we're a bit cautious of Silver One 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 Silver One Resources To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of Silver One 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. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of CA$58m, Silver One Resources' CA$3.6m in cash burn equates to about 6.3% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

So, Should We Worry About Silver One Resources' Cash Burn?

On this analysis of Silver One Resources' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. On another note, Silver One Resources has 5 warning signs (and 3 which are a bit concerning) we think 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. 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.