Will Bluejay Mining (LON:JAY) Spend Its Cash Wisely?

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Bluejay Mining (LON:JAY) stock is up 166% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Bluejay Mining's cash burn is. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Bluejay Mining

When Might Bluejay Mining Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Bluejay Mining last reported its balance sheet in June 2020, it had zero debt and cash worth UK£7.0m. Looking at the last year, the company burnt through UK£10m. That means it had a cash runway of around 8 months as of June 2020. Importantly, the one analyst we see covering the stock thinks that Bluejay Mining will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

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

Because Bluejay 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 36%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Easily Can Bluejay Mining Raise Cash?

Given its cash burn trajectory, Bluejay Mining shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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 UK£99m, Bluejay Mining's UK£10m in cash burn equates to about 10% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Bluejay Mining's Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Bluejay Mining's cash burn relative to its market cap was relatively promising. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Summing up, we think the Bluejay Mining's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Bluejay Mining (3 don't sit too well with us!) 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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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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