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There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Scandium International Mining (TSE:SCY) stock is up 271% in the last year, providing strong gains for shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So notwithstanding the buoyant share price, we think it's well worth asking whether Scandium International Mining's cash burn is too risky. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Scandium International Mining's Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Scandium International Mining last reported its balance sheet in September 2020, it had zero debt and cash worth US$146k. Importantly, its cash burn was US$73k over the trailing twelve months. That means it had a cash runway of about 2.0 years as of September 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.
How Is Scandium International Mining's Cash Burn Changing Over Time?
Scandium International Mining didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 95% in the last twelve months. While that hardly points to growth potential, it does at least suggest the company is trying to survive. Admittedly, we're a bit cautious of Scandium International Mining due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Scandium International Mining Raise Cash?
There's no doubt Scandium International Mining'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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Scandium International Mining's cash burn of US$73k is about 0.1% of its US$61m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Scandium International Mining's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Scandium International Mining is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. Its cash runway wasn't quite as good, but was still rather encouraging! Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Scandium International Mining that potential shareholders should take into account before putting money into a stock.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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