There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Noram Ventures (CVE:NRM) has seen its share price rise 456% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
In light of its strong share price run, we think now is a good time to investigate how risky Noram Ventures' cash burn is. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Noram Ventures' Cash Runway?
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 Noram Ventures last reported its balance sheet in October 2020, it had zero debt and cash worth CA$1.5m. In the last year, its cash burn was CA$664k. So it had a cash runway of about 2.2 years from October 2020. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is Noram Ventures' Cash Burn Changing Over Time?
Because Noram Ventures isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 24% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of Noram Ventures 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 Noram Ventures To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Noram Ventures to raise more cash in the future. Companies can raise capital through either debt or equity. 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.
Noram Ventures' cash burn of CA$664k is about 2.0% of its CA$32m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
So, Should We Worry About Noram Ventures' Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Noram Ventures is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. On another note, Noram Ventures has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
Of course Noram Ventures 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.
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.
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