Yahoo Finance Prospero Silver (CVE:PSL) Is Very Risky Based On Its Cash Burn
We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Prospero Silver (CVE:PSL) shareholders 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Prospero Silver
How Long Is Prospero Silver's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Prospero Silver had CA$169k in cash, and was debt-free. Looking at the last year, the company burnt through CA$2.0m. So it seems to us it had a cash runway of less than two months from September 2019. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.
How Is Prospero Silver's Cash Burn Changing Over Time?
Because Prospero Silver isn't currently generating revenue, we consider it an early-stage 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 29% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we're a bit cautious of Prospero Silver due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can Prospero Silver Raise More Cash Easily?
While Prospero Silver 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. 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 CA$1.4m, Prospero Silver's CA$2.0m in cash burn equates to about 141% of its market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.
So, Should We Worry About Prospero Silver's Cash Burn?
As you can probably tell by now, we're rather concerned about Prospero Silver's cash burn. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its cash burn reduction is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Taking a deeper dive, we've spotted 5 warning signs for Prospero Silver you should be aware of, and 3 of them shouldn't be ignored.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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