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We're Keeping An Eye On NuLegacy Gold's (CVE:NUG) Cash Burn Rate

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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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether NuLegacy Gold (CVE:NUG) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for NuLegacy Gold

How Long Is NuLegacy Gold's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In December 2019, NuLegacy Gold had CA$5.7m in cash, and was debt-free. Looking at the last year, the company burnt through CA$6.0m. Therefore, from December 2019 it had roughly 11 months of cash runway. 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.

TSXV:NUG Historical Debt, March 9th 2020
TSXV:NUG Historical Debt, March 9th 2020

How Is NuLegacy Gold's Cash Burn Changing Over Time?

NuLegacy Gold didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. It's possible that the 8.1% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we're a bit cautious of NuLegacy Gold 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 NuLegacy Gold To Raise More Cash For Growth?

While NuLegacy Gold is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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.

NuLegacy Gold has a market capitalisation of CA$20m and burnt through CA$6.0m last year, which is 29% 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.

So, Should We Worry About NuLegacy Gold's Cash Burn?

On this analysis of NuLegacy Gold'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. Summing up, we think the NuLegacy Gold's cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that NuLegacy Gold 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.

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.

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. Thank you for reading.