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We're Interested To See How Suvo Strategic Minerals (ASX:SUV) Uses Its Cash Hoard To Grow

·4-min read

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Suvo Strategic Minerals (ASX:SUV) shareholders is whether they should be concerned by its rate of 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' cash, relative to its cash burn.

View our latest analysis for Suvo Strategic Minerals

Does Suvo Strategic Minerals Have A Long Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2021, Suvo Strategic Minerals had AU$4.4m in cash, and was debt-free. Importantly, its cash burn was AU$599k over the trailing twelve months. Therefore, from December 2021 it had 7.4 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
debt-equity-history-analysis

How Is Suvo Strategic Minerals' Cash Burn Changing Over Time?

In our view, Suvo Strategic Minerals doesn't yet produce significant amounts of operating revenue, since it reported just AU$13m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 87% in the last twelve months. That might not be promising when it comes to business development, but it's good for the companies cash preservation. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Suvo Strategic Minerals is building its business over time.

Can Suvo Strategic Minerals Raise More Cash Easily?

There's no doubt Suvo Strategic Minerals' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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 AU$30m, Suvo Strategic Minerals' AU$599k in cash burn equates to about 2.0% 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.

Is Suvo Strategic Minerals' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Suvo Strategic Minerals is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. And even its cash burn relative to its market cap was very encouraging. 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 an in-depth view of risks, we've identified 3 warning signs for Suvo Strategic Minerals that you should be aware of before investing.

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)

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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