In This Article:
We can readily understand why investors are attracted to unprofitable companies. 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.
Given this risk, we thought we'd take a look at whether Silver Mountain Resources (CVE:AGMR) 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.
View our latest analysis for Silver Mountain Resources
When Might Silver Mountain Resources Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2024, Silver Mountain Resources had cash of US$6.2m and no debt. Looking at the last year, the company burnt through US$12m. Therefore, from June 2024 it had roughly 6 months of cash runway. Notably, one analyst forecasts that Silver Mountain Resources will break even (at a free cash flow level) in about 2 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Silver Mountain Resources' Cash Burn Changing Over Time?
Silver Mountain Resources didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Given the length of the cash runway, we'd interpret the 21% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Silver Mountain Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Silver Mountain Resources Raise More Cash Easily?
While Silver Mountain Resources 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.