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Here's Why We're A Bit Worried About Kingsrose Mining's (ASX:KRM) Cash Burn Situation

Simply Wall St

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.

So, the natural question for Kingsrose Mining (ASX:KRM) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Kingsrose Mining

Does Kingsrose Mining 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 Kingsrose Mining last reported its balance sheet in June 2019, it had zero debt and cash worth AU$4.3m. Importantly, its cash burn was AU$5.9m over the trailing twelve months. That means it had a cash runway of around 9 months as of June 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

ASX:KRM Historical Debt, December 6th 2019

Is Kingsrose Mining's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Kingsrose Mining actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 27%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Kingsrose Mining is building its business over time.

How Easily Can Kingsrose Mining Raise Cash?

Given its problematic fall in revenue, Kingsrose Mining shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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).

Kingsrose Mining's cash burn of AU$5.9m is about 27% of its AU$22m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

Is Kingsrose Mining's Cash Burn A Worry?

We must admit that we don't think Kingsrose Mining is in a very strong position, when it comes to its cash burn. Although we can understand if some shareholders find its cash burn relative to its market cap acceptable, we can't ignore the fact that we consider its cash runway to be downright troublesome. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Kingsrose Mining insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

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.

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. Thank you for reading.