Yahoo Finance We Think Clarmin Explorations (CVE:CX) Can Afford To Drive Business Growth
We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. 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 Clarmin Explorations (CVE:CX) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Clarmin Explorations
How Long Is Clarmin Explorations's 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. In October 2019, Clarmin Explorations had CA$303k in cash, and was debt-free. In the last year, its cash burn was CA$104k. That means it had a cash runway of about 2.9 years as of October 2019. 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 Clarmin Explorations's Cash Burn Changing Over Time?
Because Clarmin Explorations 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. Even though it doesn't get us excited, the 32% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Clarmin Explorations 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 Clarmin Explorations Raise More Cash Easily?
While Clarmin Explorations is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
Clarmin Explorations's cash burn of CA$104k is about 15% of its CA$710k market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Clarmin Explorations's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Clarmin Explorations's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even though its cash burn relative to its market cap wasn't quite as impressive, it was still a positive. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Clarmin Explorations (of which 2 are potentially serious!) you should know about.
Of course Clarmin Explorations may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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.
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