We can readily understand why investors are attracted to unprofitable companies. For example, 1911 Gold (CVE:AUMB) shareholders have done very well over the last year, with the share price soaring by 151%. 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 its strong share price performance, we think it's worthwhile for 1911 Gold shareholders to consider whether its cash burn is concerning. 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. Let's start with an examination of the business' cash, relative to its cash burn.
When Might 1911 Gold Run Out Of Money?
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. When 1911 Gold last reported its balance sheet in September 2020, it had zero debt and cash worth CA$9.0m. Looking at the last year, the company burnt through CA$4.2m. So it had a cash runway of about 2.1 years from September 2020. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Well Is 1911 Gold Growing?
At first glance it's a bit worrying to see that 1911 Gold actually boosted its cash burn by 5.6%, year on year. And we must say we find it concerning that operating revenue dropped 15% over the same period. In light of the data above, we're fairly sanguine about the business growth trajectory. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how 1911 Gold is building its business over time.
Can 1911 Gold Raise More Cash Easily?
Even though it seems like 1911 Gold is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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 and 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.
1911 Gold has a market capitalisation of CA$27m and burnt through CA$4.2m last year, which is 15% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is 1911 Gold's Cash Burn Situation?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought 1911 Gold's cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for 1911 Gold (1 doesn't sit too well with us!) that you should be aware of before investing here.
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)
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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