Here's Why We're A Bit Worried About Norsk Titanium's (OB:NTI) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Norsk Titanium (OB:NTI) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Norsk Titanium

When Might Norsk Titanium Run Out Of Money?

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. In June 2022, Norsk Titanium had US$12m in cash, and was debt-free. In the last year, its cash burn was US$21m. Therefore, from June 2022 it had roughly 7 months of cash runway. Notably, one analyst forecasts that Norsk Titanium will break even (at a free cash flow level) in about 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Is Norsk Titanium's Cash Burn Changing Over Time?

In our view, Norsk Titanium doesn't yet produce significant amounts of operating revenue, since it reported just US$1.1m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Given the length of the cash runway, we'd interpret the 21% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. 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.

Can Norsk Titanium Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Norsk Titanium to raise more 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. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Norsk Titanium has a market capitalisation of US$67m and burnt through US$21m last year, which is 31% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Norsk Titanium's Cash Burn A Worry?

On this analysis of Norsk Titanium's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. One real positive is that at least one analyst is forecasting that the company will reach breakeven. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. On another note, Norsk Titanium has 4 warning signs (and 2 which are significant) we think you should know about.

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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.