Advertisement
Canada markets open in 3 hours 58 minutes
  • S&P/TSX

    22,107.08
    +194.56 (+0.89%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CAD/USD

    0.7348
    -0.0025 (-0.34%)
     
  • CRUDE OIL

    81.61
    +0.26 (+0.32%)
     
  • Bitcoin CAD

    96,201.84
    +1,142.07 (+1.20%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,216.20
    +3.50 (+0.16%)
     
  • RUSSELL 2000

    2,114.35
    +44.19 (+2.13%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • NASDAQ futures

    18,469.25
    -34.50 (-0.19%)
     
  • VOLATILITY

    12.99
    +0.21 (+1.64%)
     
  • FTSE

    7,961.81
    +29.83 (+0.38%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • CAD/EUR

    0.6812
    +0.0007 (+0.10%)
     

Is Reunion Gold (CVE:RGD) In A Good Position To Deliver On Growth Plans?

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Reunion Gold (CVE:RGD) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Reunion Gold

Does Reunion Gold Have A Long 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. Reunion Gold has such a small amount of debt that we'll set it aside, and focus on the CA$5.7m in cash it held at September 2020. Looking at the last year, the company burnt through CA$6.1m. That means it had a cash runway of around 11 months as of September 2020. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Reunion Gold's Cash Burn Changing Over Time?

Because Reunion Gold 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. Given the length of the cash runway, we'd interpret the 54% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Reunion 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.

Can Reunion Gold Raise More Cash Easily?

While we're comforted by the recent reduction evident from our analysis of Reunion Gold'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. 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).

ADVERTISEMENT

Reunion Gold's cash burn of CA$6.1m is about 11% of its CA$56m 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 Reunion Gold's Cash Burn Situation?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Reunion Gold's cash burn reduction was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Reunion Gold has 4 warning signs (and 2 which make us uncomfortable) 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.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.