Yahoo Finance Arena Minerals (CVE:AN) Is Very Risky Based On Its Cash Burn
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Arena Minerals (CVE:AN) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Arena Minerals
How Long Is Arena Minerals's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2019, Arena Minerals had CA$804k in cash, and was debt-free. Importantly, its cash burn was CA$2.7m over the trailing twelve months. So it had a cash runway of approximately 4 months from September 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. The image below shows how its cash balance has been changing over the last few years.
How Is Arena Minerals's Cash Burn Changing Over Time?
Arena Minerals didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. The skyrocketing cash burn up 148% year on year certainly tests our nerves. It's fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Admittedly, we're a bit cautious of Arena Minerals due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Arena Minerals Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, Arena Minerals 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. 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.
Arena Minerals has a market capitalisation of CA$4.3m and burnt through CA$2.7m last year, which is 63% of the company's market value. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
Is Arena Minerals's Cash Burn A Worry?
There are no prizes for guessing that we think Arena Minerals's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its cash burn relative to its market cap 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. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Arena Minerals (of which 3 are concerning!) you should know about.
Of course Arena Minerals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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