Yahoo Finance Nexus Gold (CVE:NXS) Will Have To Spend Its Cash Wisely
We can readily understand why investors are attracted to unprofitable companies. 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 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, the natural question for Nexus Gold (CVE:NXS) shareholders is whether they should be concerned by its rate of 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.
View our latest analysis for Nexus Gold
Does Nexus Gold 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. In July 2019, Nexus Gold had CA$307k in cash, and was debt-free. Looking at the last year, the company burnt through CA$2.9m. So it seems to us it had a cash runway of less than two months from July 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 Nexus Gold's Cash Burn Changing Over Time?
Nexus Gold didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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 38% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Nexus Gold 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 Easily Can Nexus Gold Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Nexus Gold 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).
Nexus Gold's cash burn of CA$2.9m is about 71% of its CA$4.1m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
How Risky Is Nexus Gold's Cash Burn Situation?
There are no prizes for guessing that we think Nexus Gold's cash burn is a bit of a worry. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. 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. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Nexus Gold's CEO gets paid each year.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
