Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Eskay Mining (CVE:ESK) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Does Eskay Mining Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at August 2019, Eskay Mining had cash of CA$104k and no debt. Looking at the last year, the company burnt through CA$84k. Therefore, from August 2019 it had roughly 15 months of cash runway. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Is Eskay Mining's Cash Burn Changing Over Time?
Eskay Mining 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. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 90% 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. Admittedly, we're a bit cautious of Eskay Mining due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Eskay Mining Raise Cash?
While we're comforted by the recent reduction evident from our analysis of Eskay Mining's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Since it has a market capitalisation of CA$16m, Eskay Mining's CA$84k in cash burn equates to about 0.5% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
Is Eskay Mining's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about Eskay Mining's cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. On this analysis its cash runway was its weakest feature, but we are not concerned about it. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. Notably, our data indicates that Eskay Mining insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course Eskay Mining 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 email@example.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.
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