Can Golden Ridge Resources (CVE:GLDN) Afford To Invest In Growth?
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Golden Ridge Resources (CVE:GLDN) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Golden Ridge Resources
How Long Is Golden Ridge Resources's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Golden Ridge Resources had CA$1.1m in cash, and was debt-free. Looking at the last year, the company burnt through CA$3.9m. So it had a cash runway of approximately 3 months from September 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.
How Is Golden Ridge Resources's Cash Burn Changing Over Time?
Because Golden Ridge Resources isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The 57% 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. Golden Ridge 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.
Can Golden Ridge Resources Raise More Cash Easily?
There's no doubt Golden Ridge 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. 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.
Since it has a market capitalisation of CA$4.4m, Golden Ridge Resources's CA$3.9m in cash burn equates to about 89% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
How Risky Is Golden Ridge Resources's Cash Burn Situation?
As you can probably tell by now, we're rather concerned about Golden Ridge Resources's cash burn. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Notably, our data indicates that Golden Ridge Resources insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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.
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