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Here's Why We're Watching GMV Minerals's (CVE:GMV) Cash Burn Situation

Simply Wall St

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether GMV Minerals (CVE:GMV) shareholders should 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'.

See our latest analysis for GMV Minerals

How Long Is GMV Minerals's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When GMV Minerals last reported its balance sheet in March 2019, it had zero debt and cash worth CA$372k. In the last year, its cash burn was CA$863k. So it had a cash runway of approximately 5 months from March 2019. 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:GMV Historical Debt, September 23rd 2019

How Is GMV Minerals's Cash Burn Changing Over Time?

GMV Minerals didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. As it happens, the company's cash burn reduced by 51% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we're a bit cautious of GMV Minerals 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 GMV Minerals To Raise More Cash For Growth?

While we're comforted by the recent reduction evident from our analysis of GMV 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. 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.

GMV Minerals has a market capitalisation of CA$7.7m and burnt through CA$863k last year, which is 11% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

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

On this analysis of GMV Minerals's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Summing up, we think the GMV Minerals's cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that GMV Minerals insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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

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.

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. Thank you for reading.