We Think Beowulf Mining (LON:BEM) Can Afford To Drive Business Growth

December 26, 2021
  •  Updated
April 29, 2022
AIM:BEM
Source: Shutterstock

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, Beowulf Mining (LON:BEM) shareholders have done very well over the last year, with the share price soaring by 176%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Beowulf Mining's cash burn is too risky. 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'.

Check out our latest analysis for Beowulf Mining

How Long Is Beowulf Mining's 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 Beowulf Mining last reported its balance sheet in September 2021, it had zero debt and cash worth UK£3.9m. Looking at the last year, the company burnt through UK£2.1m. So it had a cash runway of approximately 22 months from September 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
AIM:BEM Debt to Equity History December 26th 2021

How Is Beowulf Mining's Cash Burn Changing Over Time?

Because Beowulf Mining isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by 23%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Beowulf Mining 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 Hard Would It Be For Beowulf Mining To Raise More Cash For Growth?

While Beowulf Mining does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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).

Beowulf Mining's cash burn of UK£2.1m is about 2.1% of its UK£100m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is Beowulf Mining's Cash Burn A Worry?

On this analysis of Beowulf Mining's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Beowulf Mining (2 are significant!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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