Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Dart Mining (ASX:DTM) shareholders be worried about its 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). Let's start with an examination of the business's cash, relative to its cash burn.
How Long Is Dart Mining's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, Dart Mining had AU$252k in cash, and was debt-free. In the last year, its cash burn was AU$1.9m. That means it had a cash runway of around 2 months as of December 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 Dart Mining's Cash Burn Changing Over Time?
Whilst it's great to see that Dart Mining has already begun generating revenue from operations, last year it only produced AU$14k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Over the last year its cash burn actually increased by 14%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of Dart 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.
Can Dart Mining Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, Dart Mining shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Dart Mining has a market capitalisation of AU$2.4m and burnt through AU$1.9m last year, which is 81% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
How Risky Is Dart Mining's Cash Burn Situation?
There are no prizes for guessing that we think Dart Mining's cash burn is a bit of a worry. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. And although we accept its increasing cash burn wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. Its cash burn burn situation feels about as relaxing as riding your bicycle home in the rain without so much as a jumper. The need for more cash seems just around the corner, and any dilution is likely to be rather severe. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Dart Mining (3 are a bit unpleasant!) that you should be aware of before investing here.
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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