Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Surefire Resources (ASX:SRN) shareholders should 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Surefire Resources Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2019, Surefire Resources had cash of AU$559k and no debt. Importantly, its cash burn was AU$1.4m over the trailing twelve months. Therefore, from December 2019 it had roughly 5 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.
How Is Surefire Resources's Cash Burn Changing Over Time?
Because Surefire Resources 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. It's possible that the 16% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we're a bit cautious of Surefire Resources 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 Surefire Resources Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Surefire Resources to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Surefire Resources's cash burn of AU$1.4m is about 143% of its AU$942k market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
So, Should We Worry About Surefire Resources's Cash Burn?
There are no prizes for guessing that we think Surefire Resources's cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. While not as bad as its cash burn relative to its market cap, its cash burn reduction is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. On another note, Surefire Resources has 6 warning signs (and 3 which are a bit unpleasant) we think you should know about.
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)
If you spot an error that warrants correction, please contact the editor at email@example.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.
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