Yahoo Finance Will Adamera Minerals (CVE:ADZ) Spend Its Cash Wisely?
Just because a business does not make any money, does not mean that the stock will go down. 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 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 Adamera Minerals (CVE:ADZ) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for Adamera Minerals
Does Adamera Minerals Have A Long Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at December 2019, Adamera Minerals had cash of CA$158k and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through CA$555k. So it had a cash runway of approximately 3 months from December 2019. 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 Adamera Minerals's Cash Burn Changing Over Time?
Because Adamera Minerals isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. We'd venture that the 67% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. Adamera Minerals makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Adamera Minerals To Raise More Cash For Growth?
While we're comforted by the recent reduction evident from our analysis of Adamera Minerals's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive 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.
Adamera Minerals's cash burn of CA$555k is about 11% of its CA$5.3m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is Adamera Minerals's Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Adamera Minerals's cash burn reduction was relatively promising. Summing up, we think the Adamera Minerals's cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 4 warning signs for Adamera Minerals you should be aware of, and 2 of them are a bit concerning.
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 editorial-team@simplywallst.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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