Just because a business does not make any money, does not mean that the stock will go down. 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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Klondike Gold (CVE:KG) shareholders should 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). Let's start with an examination of the business's cash, relative to its cash burn.
Does Klondike Gold Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In August 2019, Klondike Gold had CA$1.7m in cash, and was debt-free. In the last year, its cash burn was CA$5.5m. Therefore, from August 2019 it had roughly 4 months of cash runway. 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 Klondike Gold's Cash Burn Changing Over Time?
Klondike 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. Over the last year its cash burn actually increased by 3.5%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Klondike Gold Raise Cash?
Since its cash burn is increasing (albeit only slightly), Klondike Gold shareholders should still be mindful of the possibility it will require more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Klondike Gold's cash burn of CA$5.5m is about 20% of its CA$27m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
Is Klondike Gold's Cash Burn A Worry?
Klondike Gold is not in a great position when it comes to its cash burn situation. While its cash burn relative to its market cap wasn't too bad, its cash runway does leave us rather nervous. 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 Klondike Gold insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course Klondike 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.
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 firstname.lastname@example.org. 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.