Yahoo Finance We're Not Very Worried About Golden Tag Resources' (CVE:GOG) Cash Burn Rate
We can readily understand why investors are attracted to unprofitable companies. For example, Golden Tag Resources (CVE:GOG) shareholders have done very well over the last year, with the share price soaring by 856%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So notwithstanding the buoyant share price, we think it's well worth asking whether Golden Tag Resources'cash burn is too risky 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'.
Check out our latest analysis for Golden Tag Resources
How Long Is Golden Tag Resources' 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. As at September 2020, Golden Tag Resources had cash of CA$9.2m and no debt. Looking at the last year, the company burnt through CA$968k. So it had a cash runway of about 9.5 years from September 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.
How Is Golden Tag Resources' Cash Burn Changing Over Time?
Because Golden Tag Resources 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. Its cash burn positively exploded in the last year, up 258%. We certainly hope for shareholders' sake that the money is well spent, because that kind of expenditure increase always makes us nervous. Admittedly, we're a bit cautious of Golden Tag Resources due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Golden Tag Resources Raise More Cash Easily?
While Golden Tag Resources does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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$73m, Golden Tag Resources' CA$968k in cash burn equates to about 1.3% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Golden Tag Resources' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Golden Tag Resources' cash burn. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. 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. Taking a deeper dive, we've spotted 3 warning signs for Golden Tag Resources you should be aware of, and 1 of them is concerning.
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)
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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