U.S. markets open in 59 minutes
  • S&P Futures

    3,668.75
    +1.50 (+0.04%)
     
  • Dow Futures

    29,889.00
    +21.00 (+0.07%)
     
  • Nasdaq Futures

    12,484.00
    +29.75 (+0.24%)
     
  • Russell 2000 Futures

    1,838.20
    +0.70 (+0.04%)
     
  • Crude Oil

    45.13
    -0.15 (-0.33%)
     
  • Gold

    1,843.40
    +13.20 (+0.72%)
     
  • Silver

    24.22
    +0.14 (+0.56%)
     
  • EUR/USD

    1.2154
    +0.0038 (+0.32%)
     
  • 10-Yr Bond

    0.9480
    0.0000 (0.00%)
     
  • Vix

    20.85
    +0.08 (+0.39%)
     
  • GBP/USD

    1.3454
    +0.0078 (+0.59%)
     
  • USD/JPY

    104.0740
    -0.3500 (-0.34%)
     
  • BTC-USD

    19,354.77
    +405.52 (+2.14%)
     
  • CMC Crypto 200

    380.38
    +15.47 (+4.24%)
     
  • FTSE 100

    6,483.93
    +20.54 (+0.32%)
     
  • Nikkei 225

    26,809.37
    +8.39 (+0.03%)
     

Here's Why We're A Bit Worried About Plata Latina Minerals's (CVE:PLA) Cash Burn Situation

Simply Wall St
·4 min read

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Plata Latina Minerals (CVE:PLA) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Plata Latina Minerals

Does Plata Latina Minerals Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In September 2019, Plata Latina Minerals had CA$355k in cash, and was debt-free. In the last year, its cash burn was CA$768k. Therefore, from September 2019 it had roughly 6 months of cash runway. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. Depicted below, you can see how its cash holdings have changed over time.

TSXV:PLA Historical Debt, February 18th 2020
TSXV:PLA Historical Debt, February 18th 2020

How Is Plata Latina Minerals's Cash Burn Changing Over Time?

Plata Latina Minerals 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. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Plata Latina Minerals makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Plata Latina Minerals Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Plata Latina Minerals to raise 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. 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$2.4m, Plata Latina Minerals's CA$768k in cash burn equates to about 32% of its market value. 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.

So, Should We Worry About Plata Latina Minerals's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Plata Latina Minerals's cash burn reduction was relatively promising. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Plata Latina Minerals's CEO gets paid each year.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.