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We're Keeping An Eye On Talmora Diamond's (CSE:TAI) Cash Burn Rate

Simply Wall St

We can readily understand why investors are attracted to unprofitable companies. 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, the natural question for Talmora Diamond (CSE:TAI) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Talmora Diamond

Does Talmora Diamond Have A Long 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. When Talmora Diamond last reported its balance sheet in September 2019, it had zero debt and cash worth CA$74k. In the last year, its cash burn was CA$120k. That means it had a cash runway of around 7 months as of September 2019. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.

CNSX:TAI Historical Debt, December 24th 2019

Can Talmora Diamond Raise More Cash Easily?

Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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$1.4m, Talmora Diamond's CA$120k in cash burn equates to about 8.5% 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 Talmora Diamond's Cash Burn Situation?

Because Talmora Diamond is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. However, it is fair to say that its cash burn relative to its market cap gave us comfort. For us, the key takeaway here is that its cash burn is worth monitoring closely because it may have to raise more capital in due course. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Talmora Diamond CEO receives in total remuneration.

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)

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.

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