There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should New Tech Minerals (CNSX:NTM) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might New Tech Minerals Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In April 2019, New Tech Minerals had CA$265k in cash, and was debt-free. In the last year, its cash burn was CA$696k. That means it had a cash runway of around 5 months as of April 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. The image below shows how its cash balance has been changing over the last few years.
How Is New Tech Minerals's Cash Burn Changing Over Time?
Because New Tech Minerals isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. We'd venture that the 59% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. New Tech Minerals 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.
How Easily Can New Tech Minerals Raise Cash?
While we're comforted by the recent reduction evident from our analysis of New Tech Minerals's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).
Since it has a market capitalisation of CA$1.2m, New Tech Minerals's CA$696k in cash burn equates to about 57% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
Is New Tech Minerals's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought New Tech 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. 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: New Tech Minerals 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)
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If you spot an error that warrants correction, please contact the editor at email@example.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. Thank you for reading.