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Can Skeena Resources (CVE:SKE) Afford To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Skeena Resources (CVE:SKE) shareholders should be worried about its 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 Skeena Resources

How Long Is Skeena Resources's 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. In June 2019, Skeena Resources had CA$1.2m in cash, and was debt-free. Importantly, its cash burn was CA$11m over the trailing twelve months. That means it had a cash runway of under two months as of June 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! Depicted below, you can see how its cash holdings have changed over time.

TSXV:SKE Historical Debt, November 7th 2019
TSXV:SKE Historical Debt, November 7th 2019

How Is Skeena Resources's Cash Burn Changing Over Time?

Skeena 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. As it happens, the company's cash burn reduced by 26% over the last year, which suggests that management are mindful of the possibility of running out of cash. Skeena Resources makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Skeena Resources Raise Cash?

While Skeena Resources 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. 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 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).

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Skeena Resources has a market capitalisation of CA$65m and burnt through CA$11m last year, which is 17% of the company's 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.

So, Should We Worry About Skeena Resources's Cash Burn?

On this analysis of Skeena Resources's cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Skeena Resources insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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.

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. Thank you for reading.