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We Think American Manganese (CVE:AMY) Needs To Drive Business Growth Carefully

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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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.

So, the natural question for American Manganese (CVE:AMY) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for American Manganese

How Long Is American Manganese's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at January 2020, American Manganese had cash of CA$661k and no debt. Importantly, its cash burn was CA$1.4m over the trailing twelve months. So it had a cash runway of approximately 6 months from January 2020. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. You can see how its cash balance has changed over time in the image below.

TSXV:AMY Historical Debt May 28th 2020
TSXV:AMY Historical Debt May 28th 2020

How Is American Manganese's Cash Burn Changing Over Time?

Because American Manganese isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. As it happens, the company's cash burn reduced by 50% 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 American Manganese due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can American Manganese Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for American Manganese to raise more cash in the future. 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 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.

Since it has a market capitalisation of CA$28m, American Manganese's CA$1.4m in cash burn equates to about 4.9% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

So, Should We Worry About American Manganese's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought American Manganese's cash burn relative to its market cap was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for American Manganese (2 shouldn't be ignored!) that you should be aware of before investing here.

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)

Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email 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. 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. Thank you for reading.