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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Sentinel Resources (CSE:SNL) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Sentinel Resources Run Out Of Money?
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. When Sentinel Resources last reported its balance sheet in January 2020, it had zero debt and cash worth CA$28k. In the last year, its cash burn was CA$81k. Therefore, from January 2020 it had roughly 4 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.
Can Sentinel Resources Raise More Cash Easily?
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).
Sentinel Resources has a market capitalisation of CA$2.8m and burnt through CA$81k last year, which is 2.9% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
So, Should We Worry About Sentinel Resources's Cash Burn?
Because Sentinel Resources is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. However, it is fair to say that its cash burn relative to its market cap gave us comfort. To us, there is clearly a substantial risk that that the company will have to raise costly funding, making it very hard to quantify the potential upside. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Sentinel Resources (3 are potentially serious!) that you should be aware of before investing here.
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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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. Thank you for reading.