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We can readily understand why investors are attracted to unprofitable companies. Indeed, Regulus Resources (CVE:REG) stock is up 137% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given its strong share price performance, we think it's worthwhile for Regulus Resources shareholders to consider whether its cash burn is concerning. 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 Regulus Resources
When Might Regulus Resources Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2024, Regulus Resources had cash of CA$13m and no debt. Importantly, its cash burn was CA$5.0m over the trailing twelve months. That means it had a cash runway of about 2.7 years as of September 2024. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Is Regulus Resources' Cash Burn Changing Over Time?
Regulus Resources 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 53% over the last year suggests some degree of prudence. Regulus Resources makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Regulus Resources To Raise More Cash For Growth?
There's no doubt Regulus Resources' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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.