China Natural Resources (NASDAQ:CHNR) Is In A Good Position To Deliver On Growth Plans

By
Simply Wall St
Published
November 22, 2021
NasdaqCM:CHNR
Source: Shutterstock

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether China Natural Resources (NASDAQ:CHNR) shareholders should be worried about its 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for China Natural Resources

When Might China Natural Resources Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2021, China Natural Resources had CN¥137m in cash, and was debt-free. In the last year, its cash burn was CN¥8.7m. That means it had a cash runway of very many years as of June 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
NasdaqCM:CHNR Debt to Equity History November 23rd 2021

How Is China Natural Resources' Cash Burn Changing Over Time?

Because China Natural Resources 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. Its cash burn positively exploded in the last year, up 331%. That kind of sharp increase in spending may pay off, but is generally considered quite risky. China Natural Resources 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 China Natural Resources To Raise More Cash For Growth?

While China Natural Resources 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. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Since it has a market capitalisation of CN¥277m, China Natural Resources' CN¥8.7m in cash burn equates to about 3.1% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is China Natural Resources' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way China Natural Resources is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Separately, we looked at different risks affecting the company and spotted 4 warning signs for China Natural Resources (of which 1 can't be ignored!) you should know about.

Of course China Natural Resources 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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