We're Hopeful That Wishbone Gold (LON:WSBN) Will Use Its Cash Wisely

We can readily understand why investors are attracted to unprofitable companies. By way of example, Wishbone Gold (LON:WSBN) has seen its share price rise 864% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for Wishbone Gold shareholders to consider whether its cash burn is concerning. 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.

View our latest analysis for Wishbone Gold

When Might Wishbone Gold Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Wishbone Gold last reported its balance sheet in December 2020, it had zero debt and cash worth US$2.2m. Importantly, its cash burn was US$929k over the trailing twelve months. So it had a cash runway of about 2.4 years from December 2020. Arguably, that's a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

How Well Is Wishbone Gold Growing?

Wishbone Gold boosted investment sharply in the last year, with cash burn ramping by 71%. If that's not bad enough, it actually saw operating revenue decrease by a whopping 87% over the last year, suggesting the company is going through some sort of dangerous transition. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Wishbone Gold is building its business over time.

How Easily Can Wishbone Gold Raise Cash?

Even though it seems like Wishbone Gold is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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 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 US$32m, Wishbone Gold's US$929k in cash burn equates to about 2.9% of its market value. 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.

How Risky Is Wishbone Gold's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Wishbone Gold's cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Wishbone Gold has 5 warning signs (and 2 which are potentially serious) we think you should know about.

Of course Wishbone Gold 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. 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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