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Is Duketon Mining Limited (ASX:DKM) Growing Too Fast?

Simply Wall St

Duketon Mining Limited (ASX:DKM) continues its loss-making streak, announcing negative earnings for its latest financial year ending. Savvy investors should always reassess the situation of loss-making companies frequently, and keep informed about whether or not these businesses are in a strong cash position. Selling new shares may dilute the value of existing shares on issue, and since Duketon Mining is currently burning more cash than it is making, it’s likely the business will need funding for future growth. Duketon Mining may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.

Check out our latest analysis for Duketon Mining

What is cash burn?

Currently, Duketon Mining has AU$3.3m in cash holdings and producing negative free cash flow of -AU$3.0m. The biggest threat facing Duketon Mining investors is the company going out of business when it runs out of money and cannot raise any more capital. Furthermore, it is not uncommon to find loss-makers in an industry such as metals and mining. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.

ASX:DKM Income Statement, September 20th 2019

When will Duketon Mining need to raise more cash?

We can measure Duketon Mining's ongoing cash expenditure requirements by looking at free cash flow, which I define as cash flow from operations minus fixed capital investment, is a measure of how much cash a company generates/loses each year.

Free cash outflows declined by 8.0% over the past year, which could be an indication of Duketon Mining putting the brakes on ramping up high growth. Though, if the company kept its cash burn level at -AU$3.0m, it may not need to raise capital for another 1.1 years. Even though this is analysis is fairly basic, and Duketon Mining still can cut its overhead further, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Duketon Mining operation is, and when things may have to change.

Next Steps:

Loss-making companies are a risky play, even those that are reducing their cash burn over time. Though, this shouldn’t discourage you from considering entering the stock in the future. The cash burn analysis result indicates a cash constraint for the company, due to its current level of cash reserves. This may lead to share price pressure in the near term, should Duketon Mining be forced to raise capital to fund its growth. This is only a rough assessment of financial health, and DKM likely also has company-specific issues impacting its cash management decisions. I recommend you continue to research Duketon Mining to get a more holistic view of the company by looking at:

  1. Historical Performance: What has DKM's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Duketon Mining’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.

NB: Figures in this article are calculated using data from the trailing twelve months from 30 June 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.

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.

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. Thank you for reading.