We're A Little Worried About Pacific Rim Cobalt's (CSE:BOLT) Cash Burn Rate
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Pacific Rim Cobalt (CSE:BOLT) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Pacific Rim Cobalt
Does Pacific Rim Cobalt Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Pacific Rim Cobalt had CA$465k in cash, and was debt-free. In the last year, its cash burn was CA$2.8m. That means it had a cash runway of around 2 months as of September 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Is Pacific Rim Cobalt's Cash Burn Changing Over Time?
Because Pacific Rim Cobalt isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Given the length of the cash runway, we'd interpret the 37% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Pacific Rim Cobalt makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Pacific Rim Cobalt To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Pacific Rim Cobalt to raise more cash in the future. 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 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.
Pacific Rim Cobalt's cash burn of CA$2.8m is about 33% of its CA$8.4m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
How Risky Is Pacific Rim Cobalt's Cash Burn Situation?
As you can probably tell by now, we're rather concerned about Pacific Rim Cobalt's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. But the silver lining was its cash burn reduction, which was encouraging. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Pacific Rim Cobalt insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
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.
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