There is no doubt that it is possible to make money by owning shares of unprofitable companies. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
So the natural question for St George Mining (ASX:SGQ) shareholders is whether they should be concerned about its cash burn rate. For the purposes of this article, cash burn is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. First, we will determine its cash trail by comparing its cash consumption with its cash reserves.
Our analysis indicates that SGQ is potentially overvalued!
Does St George Mining have a long cash trail?
You can calculate a company’s cash trail by dividing the amount of cash it has on hand by the rate at which it spends that money. When St George Mining published its last balance sheet in June 2022, it had no debt and cash worth A$4.1 million. Last year, its cash burn was A$7.5 million. Therefore, as of June 2022, he had approximately 7 months of cash. To be frank, this kind of short track puts us on edge, as it indicates that the company needs to significantly reduce its cash burn, or raise funds imminently. Below you can see how its liquidity has changed over time.
How is St George Mining’s cash burn changing over time?
As St George Mining is not currently generating revenue, we consider it a start-up business. So, while we can’t look to sales to understand growth, we can look at cash burn trends to understand spending trends over time. As it happens, the company’s cash burn has fallen by 11% over the past year, suggesting that management may be aware of the risks of running out of cash reserves. St George Mining makes us a bit nervous due to its lack of substantial operating revenue. We prefer most stocks on this list of stocks that analysts expect to see growth.
How difficult would it be for St George Mining to raise more cash for growth?
With St George Mining showing a solid reduction in its cash burn, it is still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Typically, a company will sell new stock on its own to raise cash and drive growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
St George Mining has a market capitalization of A$39m and burned A$7.5m last year, or 19% of the company’s market value. Given this situation, it’s fair to say that the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How risky is St George Mining’s cash burn situation?
Even though his cash trail makes us a bit nervous, we are bound to mention that we thought St George Mining’s reduction in cash burn was quite promising. After reviewing this range of metrics, we think shareholders should be extra careful about how the company uses its cash, because cash burn makes us uncomfortable. On a different note, we conducted a thorough investigation of the company and identified 6 warning signs for St George Mining (4 doesn’t sit too well with us!) that you should be aware of before investing here.
Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of interesting companies, and this list of growth stocks (according to analyst forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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