Batero Gold Corp. (CVE:BAT) continues its loss-making streak, announcing negative earnings for its latest financial year ending. The single most important question to ask when you’re investing in a loss-making company is – will it need to raise cash again, and if so, when? Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to raise further funds. This may not always be on good terms, which could hurt current shareholders if the new deal lowers the value of their shares. Batero Gold may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question.
What is cash burn?
Currently, Batero Gold has CA$7.8m in cash holdings and producing negative free cash flow of -CA$1.4m. Companies with high cash burn rates can eventually turn into ashes, which makes it the biggest risk an investor in loss-making companies face. Unprofitable companies operating in the highly risky metals and mining industry often face this problem, and Batero Gold is no exception. The activities of these companies tend to be project-driven, which generates lumpy cash flows, meaning the business can be loss-making for a period of time while it invests heavily in a new project.
When will Batero Gold need to raise more cash?
When negative, free cash flow (which I define as cash from operations minus fixed capital investment) can be an effective measure of how much Batero Gold has to spend each year in order to keep its business running.
In the past year, free cash outflows (excluding one-offs) rose by 19%, up sharply on the prior year. Though, my cash burn analysis suggests that Batero Gold has a cash runway of over three years, with its current level of cash holdings. This means the company’s expenditure can continue to grow at the same rate without having to raise capital in the near future. Even though this is analysis is fairly basic, and Batero Gold still can cut its overhead in the near future, or open a new line of credit instead of issuing new shares, the outcome of this analysis still helps us understand how sustainable the Batero Gold operation is, and when things may have to change.
Even if Batero Gold continues to ramp up cash burn at its current high rate over the next few years, my analysis shows us it will still not need to raise capital or take on debt any time soon. Shareholders may be pleased to know this as it signals that the company still has a strong cash reserve, as well as less likelihood of share dilution from new capital raising. However, this analysis still doesn’t tell us when Batero Gold will become breakeven. I suggest you take a look at their expected revenue growth to determine the timing of future profitability as well. This is only a rough assessment of financial health, and BAT likely also has company-specific issues impacting its cash management decisions. You should continue to research Batero Gold to get a better picture of the company by looking at:
- Historical Performance: What has BAT's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Batero Gold’s board and the CEO’s back ground.
- Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 May 2019. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.
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