Yahoo Finance We're A Little Worried About GGL Resources's (CVE:GGL) Cash Burn Rate
Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for GGL Resources (CVE:GGL) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for GGL Resources
When Might GGL Resources Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In August 2019, GGL Resources had CA$296k in cash, and was debt-free. In the last year, its cash burn was CA$583k. That means it had a cash runway of around 6 months as of August 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Is GGL Resources's Cash Burn Changing Over Time?
Because GGL Resources 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. It's possible that the 9.1% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. GGL Resources 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 Easily Can GGL Resources Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for GGL Resources to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
GGL Resources has a market capitalisation of CA$2.7m and burnt through CA$583k last year, which is 22% of the company's market value. 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.
So, Should We Worry About GGL Resources's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought GGL Resources's cash burn reduction was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: GGL Resources insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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