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Will NxGold (CVE:NXN) Spend Its Cash Wisely?

Simply Wall St

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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.

So, the natural question for NxGold (CVE:NXN) 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'. Let's start with an examination of the business's cash, relative to its cash burn.

View our latest analysis for NxGold

Does NxGold Have A Long Cash Runway?

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. As at June 2019, NxGold had cash of CA$2.7m and no debt. In the last year, its cash burn was CA$2.1m. So it had a cash runway of approximately 16 months from June 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.

TSXV:NXN Historical Debt, October 22nd 2019

How Is NxGold's Cash Burn Changing Over Time?

Because NxGold isn't currently generating revenue, we consider it an early-stage 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. The 69% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. NxGold makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

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

There's no doubt NxGold's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

NxGold has a market capitalisation of CA$2.9m and burnt through CA$2.1m last year, which is 73% of the company's market value. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.

So, Should We Worry About NxGold's Cash Burn?

On this analysis of NxGold's cash burn, we think its cash burn reduction was reassuring, while its cash burn relative to its market cap has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Notably, our data indicates that NxGold insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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.