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Companies Like Benchmark Metals (CVE:BNCH) Can Be Considered Quite Risky

Simply Wall St

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

So should Benchmark Metals (CVE:BNCH) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business's cash, relative to its cash burn.

See our latest analysis for Benchmark Metals

When Might Benchmark Metals Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Benchmark Metals last reported its balance sheet in August 2019, it had zero debt and cash worth CA$818k. Looking at the last year, the company burnt through CA$5.4m. Therefore, from August 2019 it had roughly 2 months of cash runway. 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:BNCH Historical Debt, December 5th 2019

How Is Benchmark Metals's Cash Burn Changing Over Time?

Benchmark Metals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The skyrocketing cash burn up 121% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Benchmark Metals 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 Hard Would It Be For Benchmark Metals To Raise More Cash For Growth?

Since its cash burn is moving in the wrong direction, Benchmark Metals 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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 CA$33m, Benchmark Metals's CA$5.4m in cash burn equates to about 17% 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.

Is Benchmark Metals's Cash Burn A Worry?

As you can probably tell by now, we're rather concerned about Benchmark Metals's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. And although we accept its cash burn relative to its market cap wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. 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. Notably, our data indicates that Benchmark Metals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course Benchmark Metals 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.

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.

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. Thank you for reading.