Will Chesser Resources (ASX:CHZ) Spend Its Cash Wisely?
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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Chesser Resources (ASX:CHZ) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Chesser Resources
Does Chesser Resources Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Chesser Resources last reported its balance sheet in December 2021, it had zero debt and cash worth AU$5.4m. In the last year, its cash burn was AU$8.9m. That means it had a cash runway of around 7 months as of December 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Chesser Resources' Cash Burn Changing Over Time?
Whilst it's great to see that Chesser Resources has already begun generating revenue from operations, last year it only produced AU$16k, so we don't think it is generating significant revenue, at this point. 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. The skyrocketing cash burn up 124% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Chesser Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Chesser Resources Raise Cash?
Since its cash burn is moving in the wrong direction, Chesser Resources shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 AU$70m, Chesser Resources' AU$8.9m in cash burn equates to about 13% of its market value. 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.
How Risky Is Chesser Resources' Cash Burn Situation?
On this analysis of Chesser Resources' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. 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, we conducted an in-depth investigation of the company, and identified 5 warning signs for Chesser Resources (3 are significant!) that you should be aware of before investing here.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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.
