Yahoo Finance We're Keeping An Eye On NV Gold's (CVE:NVX) Cash Burn Rate
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, the natural question for NV Gold (CVE:NVX) shareholders is whether they should be concerned by its rate of cash burn. 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. Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for NV Gold
Does NV Gold Have A Long Cash Runway?
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 NV Gold last reported its balance sheet in May 2019, it had zero debt and cash worth CA$1.4m. In the last year, its cash burn was CA$1.5m. So it had a cash runway of approximately 11 months from May 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Is NV Gold's Cash Burn Changing Over Time?
Because NV Gold 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. Given the length of the cash runway, we'd interpret the 48% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. NV Gold 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.
How Hard Would It Be For NV Gold To Raise More Cash For Growth?
While NV Gold 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. Commonly, a business will sell new shares in itself to raise cash to drive 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.
NV Gold's cash burn of CA$1.5m is about 22% of its CA$6.7m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is NV Gold's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought NV Gold's cash burn reduction was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that NV Gold insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course NV Gold 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.
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