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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Jayden Resources (CVE:JDN) shareholders 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Jayden Resources Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Jayden Resources had CA$102k in cash, and was debt-free. Looking at the last year, the company burnt through CA$25k. Therefore, from September 2019 it had 4.0 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.
How Is Jayden Resources's Cash Burn Changing Over Time?
Because Jayden Resources 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. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 98% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Jayden 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 Jayden Resources Raise More Cash Easily?
There's no doubt Jayden 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Jayden Resources's cash burn of CA$25k is about 1.9% of its CA$1.4m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Jayden Resources's Cash Burn Situation?
As you can probably tell by now, we're not too worried about Jayden Resources's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. But it's fair to say that its cash burn relative to its market cap was also very reassuring. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. 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 Jayden Resources'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 companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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