Yahoo Finance Here's Why We're A Bit Worried About Nevada Sunrise Gold's (CVE:NEV) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. 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 Nevada Sunrise Gold (CVE:NEV) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Nevada Sunrise Gold
When Might Nevada Sunrise Gold Run Out Of Money?
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. As at December 2019, Nevada Sunrise Gold had cash of CA$55k and no debt. Importantly, its cash burn was CA$766k over the trailing twelve months. That means it had a cash runway of under two months as of December 2019. To be frank we are alarmed by how short that cash runway is! You can see how its cash balance has changed over time in the image below.
How Is Nevada Sunrise Gold's Cash Burn Changing Over Time?
Because Nevada Sunrise Gold 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. Given the length of the cash runway, we'd interpret the 52% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Nevada Sunrise Gold makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Nevada Sunrise Gold Raise More Cash Easily?
There's no doubt Nevada Sunrise Gold's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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. 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.
Nevada Sunrise Gold has a market capitalisation of CA$1.6m and burnt through CA$766k last year, which is 48% of the company's market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).
So, Should We Worry About Nevada Sunrise Gold's Cash Burn?
As you can probably tell by now, we're rather concerned about Nevada Sunrise Gold's cash burn. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. On another note, Nevada Sunrise Gold has 6 warning signs (and 3 which are significant) we think you should know about.
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.
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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