Yahoo Finance We're Hopeful That Volcanic Gold Mines (CVE:VG) Will Use Its Cash Wisely
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, 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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Volcanic Gold Mines (CVE:VG) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Volcanic Gold Mines
How Long Is Volcanic Gold Mines' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Volcanic Gold Mines last reported its balance sheet in June 2021, it had zero debt and cash worth CA$10m. Importantly, its cash burn was CA$2.4m over the trailing twelve months. That means it had a cash runway of about 4.2 years as of June 2021. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Is Volcanic Gold Mines' Cash Burn Changing Over Time?
Volcanic Gold Mines 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. Its cash burn positively exploded in the last year, up 1,417%. That kind of sharp increase in spending may pay off, but is generally considered quite risky. Volcanic Gold Mines makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Volcanic Gold Mines Raise More Cash Easily?
Given its cash burn trajectory, Volcanic Gold Mines shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Volcanic Gold Mines' cash burn of CA$2.4m is about 9.2% of its CA$26m market capitalisation. 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.
How Risky Is Volcanic Gold Mines' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Volcanic Gold Mines is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Volcanic Gold Mines (of which 1 can't be ignored!) you should know about.
Of course Volcanic Gold Mines 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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