Yahoo Finance We Think Kodiak Copper (CVE:KDK) Can Afford To Drive Business Growth
We can readily understand why investors are attracted to unprofitable companies. For example, Kodiak Copper (CVE:KDK) shareholders have done very well over the last year, with the share price soaring by 355%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky Kodiak Copper's cash burn is. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for Kodiak Copper
How Long Is Kodiak Copper's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, Kodiak Copper had cash of CA$15m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CA$3.9m. So it had a cash runway of about 3.9 years from December 2020. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.
How Is Kodiak Copper's Cash Burn Changing Over Time?
Kodiak Copper didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. With the cash burn rate up 28% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Kodiak Copper 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 Kodiak Copper Raise Cash?
Given its cash burn trajectory, Kodiak Copper shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).
Since it has a market capitalisation of CA$70m, Kodiak Copper's CA$3.9m in cash burn equates to about 5.5% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Kodiak Copper's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Kodiak Copper is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Kodiak Copper (of which 1 can't be ignored!) you should know about.
Of course Kodiak Copper 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.
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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