Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, NorthIsle Copper and Gold (CVE:NCX) shareholders have done very well over the last year, with the share price soaring by 350%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So notwithstanding the buoyant share price, we think it's well worth asking whether NorthIsle Copper and Gold's cash burn is too risky. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might NorthIsle Copper and Gold Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When NorthIsle Copper and Gold last reported its balance sheet in March 2021, it had zero debt and cash worth CA$9.1m. In the last year, its cash burn was CA$1.2m. Therefore, from March 2021 it had 7.4 years of cash runway. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
How Is NorthIsle Copper and Gold's Cash Burn Changing Over Time?
In our view, NorthIsle Copper and Gold doesn't yet produce significant amounts of operating revenue, since it reported just CA$13k in the last twelve months. 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. Its cash burn positively exploded in the last year, up 476%. That kind of sharp increase in spending may pay off, but is generally considered quite risky. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Easily Can NorthIsle Copper and Gold Raise Cash?
While NorthIsle Copper and Gold does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).
NorthIsle Copper and Gold's cash burn of CA$1.2m is about 2.3% of its CA$54m 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 NorthIsle Copper and Gold's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way NorthIsle Copper and Gold is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, NorthIsle Copper and Gold has 3 warning signs (and 1 which is concerning) we think you should know about.
Of course NorthIsle Copper and Gold 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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