U.S. markets open in 8 hours 25 minutes
  • S&P Futures

    4,000.50
    -32.00 (-0.79%)
     
  • Dow Futures

    34,167.00
    -189.00 (-0.55%)
     
  • Nasdaq Futures

    11,661.50
    -121.25 (-1.03%)
     
  • Russell 2000 Futures

    1,854.40
    -15.80 (-0.84%)
     
  • Crude Oil

    73.89
    -2.39 (-3.13%)
     
  • Gold

    1,748.20
    -5.80 (-0.33%)
     
  • Silver

    21.18
    -0.25 (-1.17%)
     
  • EUR/USD

    1.0356
    -0.0048 (-0.47%)
     
  • 10-Yr Bond

    3.6910
    0.0000 (0.00%)
     
  • Vix

    20.50
    +0.08 (+0.39%)
     
  • GBP/USD

    1.2054
    -0.0036 (-0.30%)
     
  • USD/JPY

    138.2350
    -0.8650 (-0.62%)
     
  • BTC-USD

    16,167.17
    -377.54 (-2.28%)
     
  • CMC Crypto 200

    378.91
    -3.75 (-0.98%)
     
  • FTSE 100

    7,486.67
    +20.07 (+0.27%)
     
  • Nikkei 225

    28,122.92
    -160.11 (-0.57%)
     

We're Keeping An Eye On Defiance Silver's (CVE:DEF) Cash Burn Rate

Just because a business does not make any money, does not mean that the stock will go down. 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 should Defiance Silver (CVE:DEF) shareholders 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Defiance Silver

Does Defiance Silver 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. When Defiance Silver last reported its balance sheet in December 2021, it had zero debt and cash worth CA$16m. Importantly, its cash burn was CA$9.7m over the trailing twelve months. That means it had a cash runway of around 20 months as of December 2021. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Defiance Silver's Cash Burn Changing Over Time?

Because Defiance Silver 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. In fact, it ramped its spending strongly over the last year, increasing cash burn by 148%. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Admittedly, we're a bit cautious of Defiance Silver 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 Defiance Silver Raise More Cash Easily?

While Defiance Silver does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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$113m, Defiance Silver's CA$9.7m in cash burn equates to about 8.6% 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.

How Risky Is Defiance Silver's Cash Burn Situation?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Defiance Silver's cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Defiance Silver (of which 2 shouldn't be ignored!) you should know about.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.