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Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Globex Mining Enterprises (TSE:GMX) shareholders be worried about its cash burn? 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. Let's start with an examination of the business' cash, relative to its cash burn.
When Might Globex Mining Enterprises Run Out Of Money?
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. As at March 2020, Globex Mining Enterprises had cash of CA$2.6m and no debt. Looking at the last year, the company burnt through CA$1.5m. That means it had a cash runway of around 21 months as of March 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Globex Mining Enterprises Growing?
Some investors might find it troubling that Globex Mining Enterprises is actually increasing its cash burn, which is up 15% in the last year. Also concerning, operating revenue was actually down by 24% in that time. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Globex Mining Enterprises is building its business over time.
How Easily Can Globex Mining Enterprises Raise Cash?
While Globex Mining Enterprises seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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.
Since it has a market capitalisation of CA$27m, Globex Mining Enterprises' CA$1.5m in cash burn equates to about 5.5% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Globex Mining Enterprises' Cash Burn Situation?
On this analysis of Globex Mining Enterprises' cash burn, we think its cash burn relative to its market cap was reassuring, while its falling revenue has us a bit worried. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Globex Mining Enterprises that potential shareholders should take into account before putting money into a stock.
Of course Globex Mining Enterprises 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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