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Companies Like Avrupa Minerals (CVE:AVU) Can Be Considered Quite Risky

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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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Avrupa Minerals (CVE:AVU) shareholders is whether they should be concerned by its rate of 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.

Check out our latest analysis for Avrupa Minerals

How Long Is Avrupa Minerals's Cash Runway?

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. Avrupa Minerals has such a small amount of debt that we'll set it aside, and focus on the CA$47k in cash it held at June 2019. In the last year, its cash burn was CA$1.1m. That means it had a cash runway of under two months as of June 2019. To be frank we are alarmed by how short that cash runway is! You can see how its cash balance has changed over time in the image below.

TSXV:AVU Historical Debt, November 1st 2019
TSXV:AVU Historical Debt, November 1st 2019

How Is Avrupa Minerals's Cash Burn Changing Over Time?

Avrupa Minerals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Given the length of the cash runway, we'd interpret the 36% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Avrupa Minerals 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 Avrupa Minerals Raise Cash?

While Avrupa Minerals is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of CA$3.3m, Avrupa Minerals's CA$1.1m in cash burn equates to about 33% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Avrupa Minerals's Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Avrupa Minerals's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Avrupa Minerals insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

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)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.