We're Not Very Worried About Southern Cross Gold's (ASX:SXG) 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. 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 Southern Cross Gold (ASX:SXG) shareholders 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Southern Cross Gold
Does Southern Cross Gold Have A Long 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. In November 2022, Southern Cross Gold had AU$18m in cash, and was debt-free. In the last year, its cash burn was AU$7.5m. Therefore, from November 2022 it had 2.4 years of cash runway. That's decent, giving the company a couple years to develop its business. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. Depicted below, you can see how its cash holdings have changed over time.
Can Southern Cross Gold Raise More Cash Easily?
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. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Southern Cross Gold has a market capitalisation of AU$138m and burnt through AU$7.5m last year, which is 5.4% of the company's market value. 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 Southern Cross Gold's Cash Burn?
Because Southern Cross Gold is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. Having said that, we can say that its cash burn relative to its market cap was a real positive. In conclusion, we don't see why investors should be concerned with its cash burn, at least for some time. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Southern Cross Gold (of which 1 makes us a bit uncomfortable!) you should know about.
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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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