Yahoo Finance We Think CanAlaska Uranium (CVE:CVV) Can Afford To Drive Business Growth
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, CanAlaska Uranium (CVE:CVV) shareholders have done very well over the last year, with the share price soaring by 413%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
In light of its strong share price run, we think now is a good time to investigate how risky CanAlaska Uranium's cash burn is. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for CanAlaska Uranium
Does CanAlaska Uranium Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In January 2021, CanAlaska Uranium had CA$5.1m in cash, and was debt-free. In the last year, its cash burn was CA$2.3m. Therefore, from January 2021 it had 2.2 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is CanAlaska Uranium's Cash Burn Changing Over Time?
Because CanAlaska Uranium 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 36% over the last year suggests some degree of prudence. Admittedly, we're a bit cautious of CanAlaska Uranium due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can CanAlaska Uranium Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for CanAlaska Uranium to raise more cash in the future. 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 looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
CanAlaska Uranium has a market capitalisation of CA$34m and burnt through CA$2.3m last year, which is 6.9% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About CanAlaska Uranium's Cash Burn?
As you can probably tell by now, we're not too worried about CanAlaska Uranium's cash burn. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. And even though its cash burn reduction wasn't quite as impressive, it was still a positive. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, CanAlaska Uranium has 5 warning signs (and 1 which makes us a bit 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.
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