There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although Salesforce.com’s software-as-a-service business lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we’d take a look at whether Laurion Mineral Exploration (CVE:LME) shareholders should 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. Let’s start with an examination of the business’ cash, relative to its cash burn.
See our latest analysis for Laurion Mineral Exploration
Does Laurion Mineral Exploration 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 September 2022, Laurion Mineral Exploration had CA$7.6m in cash, and was debt-free. Importantly, its cash burn was CA$4.6m over the trailing twelve months. So it had a cash runway of approximately 20 months from September 2022. 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. The image below shows how its cash balance has changed over the last few years.
How Is Laurion Mineral Exploration’s Cash Burn Changing Over Time?
Laurion Mineral Exploration 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. Over the last year its cash burn actually increased by 30%, which suggests that management is 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 Laurion Mineral Exploration due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Laurion Mineral Exploration Raise Cash?
Given its cash burn trajectory, Laurion Mineral Exploration shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. 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 roughly estimate how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Laurion Mineral Exploration’s cash burn of CA$4.6m is about 5.2% of its CA$90m market capitalization. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is Laurion Mineral Exploration’s Cash Burn Situation?
On this analysis of Laurion Mineral Exploration’s cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. 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 Laurion Mineral Exploration’s situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Laurion Mineral Exploration (of which 2 are significant!) you should know about.
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)
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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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