UK Markets closed

Can Sixty North Gold Mining (CNSX:SXTY) Afford To Invest In Growth?

Simply Wall St

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Sixty North Gold Mining (CNSX:SXTY) 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. Let's start with an examination of the business's cash, relative to its cash burn.

See our latest analysis for Sixty North Gold Mining

Does Sixty North Gold Mining 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. When Sixty North Gold Mining last reported its balance sheet in July 2019, it had zero debt and cash worth CA$99k. Importantly, its cash burn was CA$1.0m over the trailing twelve months. Therefore, from July 2019 it seems to us it had less than two months of cash runway. 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.

CNSX:SXTY Historical Debt, November 29th 2019

How Is Sixty North Gold Mining's Cash Burn Changing Over Time?

Sixty North Gold 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. It's possible that the 14% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we're a bit cautious of Sixty North Gold 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 Sixty North Gold Mining Raise Cash?

While Sixty North Gold Mining 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. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.

Sixty North Gold Mining's cash burn of CA$1.0m is about 34% of its CA$3.0m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.

How Risky Is Sixty North Gold Mining's Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Sixty North Gold Mining's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. And although we accept its cash burn reduction wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. 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. Notably, our data indicates that Sixty North Gold Mining insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

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)

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.

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. Thank you for reading.