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Here's Why We're Watching BCM Resources's (CVE:B) Cash Burn Situation

Simply Wall St

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for BCM Resources (CVE:B) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for BCM Resources

How Long Is BCM Resources's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at May 2019, BCM Resources had cash of CA$24k and no debt. Importantly, its cash burn was CA$162k over the trailing twelve months. That means it had a cash runway of around 2 months as of May 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.

TSXV:B Historical Debt, November 24th 2019

How Is BCM Resources's Cash Burn Changing Over Time?

Because BCM 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. We'd venture that the 80% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Admittedly, we're a bit cautious of BCM Resources due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Hard Would It Be For BCM Resources To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of BCM Resources'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. Commonly, a business will sell new shares in itself to raise cash to drive 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.

BCM Resources's cash burn of CA$162k is about 6.9% of its CA$2.3m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

How Risky Is BCM Resources's Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought BCM Resources's cash burn reduction was relatively promising. Summing up, we think the BCM Resources's cash burn is a risk, based on the factors we mentioned in this article. 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: BCM Resources insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

Of course BCM Resources may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.