Here's Why We Worry About StrikePoint Gold's (CVE:SKP) Cash Burn Situation
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 should StrikePoint Gold (CVE:SKP) 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. Let's start with an examination of the business's cash, relative to its cash burn.
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When Might StrikePoint Gold Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2019, StrikePoint Gold had cash of CA$239k and no debt. Looking at the last year, the company burnt through CA$6.2m. That means it had a cash runway of under two months as of June 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.
How Is StrikePoint Gold's Cash Burn Changing Over Time?
StrikePoint Gold 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. In fact, it ramped its spending strongly over the last year, increasing cash burn by 118%. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Admittedly, we're a bit cautious of StrikePoint Gold 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 StrikePoint Gold To Raise More Cash For Growth?
Given its cash burn trajectory, StrikePoint Gold shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.
Since it has a market capitalisation of CA$5.0m, StrikePoint Gold's CA$6.2m in cash burn equates to about 124% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is StrikePoint Gold's Cash Burn A Worry?
As you can probably tell by now, we're rather concerned about StrikePoint Gold's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. And although we accept its increasing cash burn wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. Its cash burn situation feels about as comfortable as sitting next to the lavatory on a long haul flight. It's likely to need more cash in the near term; and that could well hurt returns. 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: StrikePoint Gold 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 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.
