We're Not Worried About Gulf Resources' (NASDAQ:GURE) Cash Burn

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Gulf Resources (NASDAQ:GURE) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Gulf Resources

How Long Is Gulf Resources' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, Gulf Resources had cash of US$97m and no debt. Importantly, its cash burn was US$2.5m over the trailing twelve months. So it had a very long cash runway of many years from June 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Gulf Resources Growing?

Gulf Resources managed to reduce its cash burn by 96% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. Arguably, however, the revenue growth of 270% during the period was even more impressive. Considering these factors, we're fairly impressed by its growth trajectory. In reality, this article only makes a short study of the company's growth data. You can take a look at how Gulf Resources is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For Gulf Resources To Raise More Cash For Growth?

There's no doubt Gulf Resources seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).

Gulf Resources has a market capitalisation of US$54m and burnt through US$2.5m last year, which is 4.6% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is Gulf Resources' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Gulf Resources is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, Gulf Resources has 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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.

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.

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