We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should New Dimension Resources (CVE:NDR) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does New Dimension Resources Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In November 2019, New Dimension Resources had CA$9.5k in cash, and was debt-free. Looking at the last year, the company burnt through CA$1.1m. That means it had a cash runway of under two months as of November 2019. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.
How Is New Dimension Resources's Cash Burn Changing Over Time?
New Dimension Resources 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. The 66% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. New Dimension Resources makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For New Dimension Resources To Raise More Cash For Growth?
There's no doubt New Dimension Resources's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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. 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.
New Dimension Resources has a market capitalisation of CA$2.0m and burnt through CA$1.1m last year, which is 53% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.
Is New Dimension Resources's Cash Burn A Worry?
There are no prizes for guessing that we think New Dimension Resources's cash burn is a bit of a worry. 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. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that New Dimension Resources insiders have been trading shares in the company. Click here to find out if they 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)
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