There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether 1911 Gold (CVE:AUMB) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does 1911 Gold Have A Long 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. When 1911 Gold last reported its balance sheet in June 2019, it had zero debt and cash worth CA$7.1m. Looking at the last year, the company burnt through CA$8.9m. So it had a cash runway of approximately 10 months from June 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. Depicted below, you can see how its cash holdings have changed over time.
How Well Is 1911 Gold Growing?
1911 Gold managed to reduce its cash burn by 58% over the last twelve months, which suggests it's on the right flight path. But it's hard to delight in that cash burn reduction given the 74% collapse in revenue. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how 1911 Gold has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can 1911 Gold Raise Cash?
Given 1911 Gold's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Companies can raise capital through either debt or equity. 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$11m, 1911 Gold's CA$8.9m in cash burn equates to about 83% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
How Risky Is 1911 Gold's Cash Burn Situation?
On this analysis of 1911 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. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Notably, our data indicates that 1911 Gold insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course 1911 Gold may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at email@example.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.