Yahoo Finance Here's Why We're A Bit Worried About Northern Shield Resources's (CVE:NRN) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. Indeed, Northern Shield Resources (CVE:NRN) stock is up 117% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky Northern Shield Resources's cash burn is. 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.
Check out our latest analysis for Northern Shield Resources
Does Northern Shield Resources Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Northern Shield Resources last reported its balance sheet in June 2019, it had zero debt and cash worth CA$186k. Looking at the last year, the company burnt through CA$1.5m. So it had a cash runway of approximately 1 months from June 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 Northern Shield Resources's Cash Burn Changing Over Time?
Because Northern Shield 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. As it happens, the company's cash burn reduced by 39% over the last year, which suggests that management are mindful of the possibility of running out of cash. Northern Shield Resources 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.
How Easily Can Northern Shield Resources Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Northern Shield 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Northern Shield Resources's cash burn of CA$1.5m is about 11% of its CA$14m 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 Northern Shield Resources's Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Northern Shield Resources's cash burn relative to its market cap was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Northern Shield Resources insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
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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. Thank you for reading.
