Yahoo Finance We're Not Very Worried About Riverside Resources's (CVE:RRI) 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Riverside Resources (CVE:RRI) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Riverside Resources
When Might Riverside Resources Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Riverside Resources last reported its balance sheet in December 2019, it had zero debt and cash worth CA$5.3m. In the last year, its cash burn was CA$2.3m. So it had a cash runway of about 2.3 years from December 2019. That's decent, giving the company a couple years to develop its business. You can see how its cash balance has changed over time in the image below.
How Is Riverside Resources's Cash Burn Changing Over Time?
Riverside Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. With the cash burn rate up 12% 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. Admittedly, we're a bit cautious of Riverside 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.
How Hard Would It Be For Riverside Resources To Raise More Cash For Growth?
While Riverside 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.
Riverside Resources has a market capitalisation of CA$11m and burnt through CA$2.3m last year, which is 20% 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.
How Risky Is Riverside Resources's Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Riverside Resources's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Riverside Resources's situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Riverside Resources (of which 1 makes us a bit uncomfortable!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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