We Think Kore Potash (LON:KP2) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Kore Potash (LON:KP2) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Kore Potash

Does Kore Potash Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Kore Potash last reported its balance sheet in June 2022, it had zero debt and cash worth US$7.6m. In the last year, its cash burn was US$6.2m. So it had a cash runway of approximately 15 months from June 2022. 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. You can see how its cash balance has changed over time in the image below.

How Is Kore Potash's Cash Burn Changing Over Time?

Because Kore Potash isn't currently generating revenue, we consider it an early-stage 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 24% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Kore Potash 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 Easily Can Kore Potash Raise Cash?

While Kore Potash is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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.

Kore Potash's cash burn of US$6.2m is about 18% of its US$34m market capitalisation. 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.

So, Should We Worry About Kore Potash's Cash Burn?

The good news is that in our view Kore Potash's cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash runway, while on the other it can also boast very strong cash burn reduction. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Kore Potash (of which 1 doesn't sit too well with us!) you should know about.

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. 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.