We're Keeping An Eye On Gulf Resources's (NASDAQ:GURE) Cash Burn Rate
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, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Gulf Resources (NASDAQ:GURE) shareholders be worried about its 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. Let's start with an examination of the business's cash, relative to its cash burn.
Check out our latest analysis for Gulf Resources
How Long Is Gulf Resources's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Gulf Resources last reported its balance sheet in June 2019, it had zero debt and cash worth US$160m. Importantly, its cash burn was US$47m over the trailing twelve months. So it had a cash runway of about 3.4 years from June 2019. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.
Is Gulf Resources's Revenue Growing?
Given that Gulf Resources actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. The harsh truth is that operating revenue dropped 78% in the last year, which is quite problematic for a cash burning company. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Gulf Resources has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Gulf Resources Raise Cash?
Since its revenue growth is moving in the wrong direction, Gulf Resources shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of US$34m, Gulf Resources's US$47m in cash burn equates to about 138% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is Gulf Resources's Cash Burn A Worry?
On this analysis of Gulf Resources's cash burn, we think its cash runway was reassuring, while its cash burn relative to its market cap has us a bit worried. 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. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Gulf Resources insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
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.
