U.S. Markets open in 7 hrs 9 mins

We're Not Very Worried About Purepoint Uranium Group's (CVE:PTU) Cash Burn Rate

Simply Wall St

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Purepoint Uranium Group (CVE:PTU) 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.

Check out our latest analysis for Purepoint Uranium Group

When Might Purepoint Uranium Group 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. As at June 2019, Purepoint Uranium Group had cash of CA$730k and no debt. In the last year, its cash burn was CA$768k. Therefore, from June 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:PTU Historical Debt, October 3rd 2019
TSXV:PTU Historical Debt, October 3rd 2019

How Is Purepoint Uranium Group's Cash Burn Changing Over Time?

Because Purepoint Uranium Group 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. We'd venture that the 67% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Purepoint Uranium Group makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can Purepoint Uranium Group Raise More Cash Easily?

There's no doubt Purepoint Uranium Group's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. 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.

Purepoint Uranium Group's cash burn of CA$768k is about 6.0% of its CA$13m market capitalisation. 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.

So, Should We Worry About Purepoint Uranium Group's Cash Burn?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Purepoint Uranium Group's cash burn reduction was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Purepoint Uranium Group's situation. Notably, our data indicates that Purepoint Uranium Group insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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)

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.

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. Thank you for reading.