Just because a business does not make any money, does not mean that the stock will go down. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Omai Gold Mines (CVE:OMG) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.
Does Omai Gold Mines Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Omai Gold Mines last reported its balance sheet in September 2020, it had zero debt and cash worth US$4.6m. Importantly, its cash burn was US$9.0m over the trailing twelve months. That means it had a cash runway of around 6 months as of September 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Omai Gold Mines' Cash Burn Changing Over Time?
Omai Gold Mines didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Its cash burn positively exploded in the last year, up 356%. Given that sharp increase in spending, the company's cash runway will shrink rapidly as it depletes its cash reserves. Admittedly, we're a bit cautious of Omai Gold Mines due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Omai Gold Mines To Raise More Cash For Growth?
Since its cash burn is moving in the wrong direction, Omai Gold Mines shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Omai Gold Mines has a market capitalisation of US$37m and burnt through US$9.0m last year, which is 25% of the company's market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is Omai Gold Mines' Cash Burn A Worry?
We must admit that we don't think Omai Gold Mines is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn't too bad, its increasing cash burn does leave us rather nervous. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. Taking a deeper dive, we've spotted 3 warning signs for Omai Gold Mines you should be aware of, and 2 of them are potentially serious.
Of course Omai Gold Mines 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.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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