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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Monument Mining (CVE:MMY) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Monument Mining
How Long Is Monument Mining's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. Monument Mining has such a small amount of debt that we'll set it aside, and focus on the US$10m in cash it held at March 2023. Looking at the last year, the company burnt through US$16m. That means it had a cash runway of around 8 months as of March 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. The image below shows how its cash balance has been changing over the last few years.
How Well Is Monument Mining Growing?
At first glance it's a bit worrying to see that Monument Mining actually boosted its cash burn by 30%, year on year. Also concerning, operating revenue was actually down by 49% in that time. Taken together, we think these growth metrics are a little worrying. 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 Monument Mining is building its business over time.
How Easily Can Monument Mining Raise Cash?
Monument Mining revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.