Yahoo Finance Will Metallic Minerals (CVE:MMG) Spend Its Cash Wisely?
We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Metallic Minerals (CVE:MMG) 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. Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for Metallic Minerals
How Long Is Metallic Minerals's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at October 2019, Metallic Minerals had cash of CA$2.7m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CA$3.2m. That means it had a cash runway of around 10 months as of October 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 Metallic Minerals's Cash Burn Changing Over Time?
Metallic Minerals 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. It's possible that the 3.5% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Metallic Minerals 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 Metallic Minerals Raise Cash?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Metallic Minerals to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Since it has a market capitalisation of CA$28m, Metallic Minerals's CA$3.2m in cash burn equates to about 11% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is Metallic Minerals's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Metallic Minerals's cash burn relative to its market cap 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. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Metallic Minerals CEO receives in total remuneration.
Of course Metallic Minerals 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
