We can readily understand why investors are attracted to unprofitable companies. 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Razore Rock Resources (CSE:RZR) 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.
When Might Razore Rock Resources Run Out Of Money?
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 Razore Rock Resources last reported its balance sheet in January 2020, it had zero debt and cash worth CA$40k. Importantly, its cash burn was CA$111k over the trailing twelve months. Therefore, from January 2020 it had roughly 4 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. You can see how its cash balance has changed over time in the image below.
How Is Razore Rock Resources's Cash Burn Changing Over Time?
Because Razore Rock Resources isn't currently generating revenue, we consider it an early-stage 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. Given the length of the cash runway, we'd interpret the 40% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we're a bit cautious of Razore Rock Resources due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Razore Rock Resources Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Razore Rock Resources to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
Razore Rock Resources has a market capitalisation of CA$371k and burnt through CA$111k last year, which is 30% of the company's market value. 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 Razore Rock Resources's Cash Burn Situation?
On this analysis of Razore Rock Resources's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. Taking a deeper dive, we've spotted 5 warning signs for Razore Rock Resources you should be aware of, and 3 of them shouldn't be ignored.
Of course Razore Rock Resources 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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