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Companies Like Laurion Mineral Exploration (CVE:LME) 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, 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So should Laurion Mineral Exploration (CVE:LME) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business's cash, relative to its cash burn.

View our latest analysis for Laurion Mineral Exploration

When Might Laurion Mineral Exploration Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2020, Laurion Mineral Exploration had CA$825k in cash, and was debt-free. Importantly, its cash burn was CA$2.3m over the trailing twelve months. So it had a cash runway of approximately 4 months from March 2020. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. The image below shows how its cash balance has been changing over the last few years.

TSXV:LME Historical Debt June 1st 2020

How Is Laurion Mineral Exploration's Cash Burn Changing Over Time?

Laurion Mineral Exploration 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. Over the last year its cash burn actually increased by a very significant 60%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Admittedly, we're a bit cautious of Laurion Mineral Exploration due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For Laurion Mineral Exploration To Raise More Cash For Growth?

Given its cash burn trajectory, Laurion Mineral Exploration shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).

Since it has a market capitalisation of CA$25m, Laurion Mineral Exploration's CA$2.3m in cash burn equates to about 9.0% 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.

So, Should We Worry About Laurion Mineral Exploration's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Laurion Mineral Exploration's cash burn relative to its market cap was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Laurion Mineral Exploration (2 shouldn't be ignored!) that you should be aware of before investing here.

Of course Laurion Mineral Exploration 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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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. 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. Thank you for reading.