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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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Northern Minerals (ASX:NTU) shareholders is whether they should be concerned by its rate of 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'.
View our latest analysis for Northern Minerals
Does Northern Minerals Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2021, Northern Minerals had cash of AU$11m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$18m. Therefore, from December 2021 it had roughly 7 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Northern Minerals Growing?
Over the last year, Northern Minerals maintained its cash burn at a fairly steady level. But we regret to inform that the revenue slid 22%, and that's not what we want to see. 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 Northern Minerals is building its business over time.
Can Northern Minerals Raise More Cash Easily?
Northern Minerals revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and 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 AU$233m, Northern Minerals' AU$18m in cash burn equates to about 7.9% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.