U.S. markets close in 2 hours 25 minutes
  • S&P 500

    3,311.54
    +40.51 (+1.24%)
     
  • Dow 30

    26,675.10
    +155.15 (+0.59%)
     
  • Nasdaq

    11,200.67
    +195.80 (+1.78%)
     
  • Russell 2000

    1,544.25
    +0.98 (+0.06%)
     
  • Crude Oil

    36.01
    -1.38 (-3.69%)
     
  • Gold

    1,868.30
    -10.90 (-0.58%)
     
  • Silver

    23.36
    +0.01 (+0.03%)
     
  • EUR/USD

    1.1658
    -0.0092 (-0.78%)
     
  • 10-Yr Bond

    0.8230
    +0.0420 (+5.38%)
     
  • GBP/USD

    1.2902
    -0.0085 (-0.66%)
     
  • USD/JPY

    104.6990
    +0.3980 (+0.38%)
     
  • BTC-USD

    13,534.62
    +379.25 (+2.88%)
     
  • CMC Crypto 200

    266.17
    +23.49 (+9.68%)
     
  • FTSE 100

    5,581.75
    -1.05 (-0.02%)
     
  • Nikkei 225

    23,331.94
    -86.57 (-0.37%)
     
COMING UP:

Apple fiscal Q4 earnings preview

Galiano Gold (TSE:GAU) Is In A Strong Position To Grow Its Business

Simply Wall St
·4 mins read

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. By way of example, Galiano Gold (TSE:GAU) has seen its share price rise 122% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether Galiano Gold's cash burn is too risky 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.

See our latest analysis for Galiano Gold

Does Galiano Gold Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Galiano Gold last reported its balance sheet in March 2020, it had zero debt and cash worth US$51m. Importantly, its cash burn was US$8.1m over the trailing twelve months. Therefore, from March 2020 it had 6.3 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.

TSX:GAU Debt to Equity History July 6th 2020
TSX:GAU Debt to Equity History July 6th 2020

How Is Galiano Gold's Cash Burn Changing Over Time?

Galiano Gold 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. Even though it doesn't get us excited, the 44% reduction in cash burn year on year does suggest the company can continue operating for quite some time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Galiano Gold Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Galiano Gold to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Galiano Gold's cash burn of US$8.1m is about 2.7% of its US$302m 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.

Is Galiano Gold's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Galiano Gold's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, Galiano Gold has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

Of course Galiano 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.