Will ZincX Resources (CVE:ZNX) Spend 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for ZincX Resources (CVE:ZNX) shareholders is whether they should be concerned by its rate of 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for ZincX Resources

When Might ZincX Resources Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. ZincX Resources has such a small amount of debt that we'll set it aside, and focus on the CA$1.3m in cash it held at December 2021. Importantly, its cash burn was CA$2.4m over the trailing twelve months. So it had a cash runway of approximately 6 months from December 2021. 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. The image below shows how its cash balance has been changing over the last few years.

How Hard Would It Be For ZincX Resources To Raise More Cash For Growth?

Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).

ZincX Resources' cash burn of CA$2.4m is about 9.0% of its CA$27m market capitalisation. 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.

Is ZincX Resources' Cash Burn A Worry?

Because ZincX Resources is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash burn relative to its market cap gave us comfort. For us, the key takeaway here is that its cash burn is worth monitoring closely because it may have to raise more capital in due course. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for ZincX Resources (2 don't sit too well with us!) that you should be aware of before investing here.

Of course ZincX 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. 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.