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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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Hawthorn Resources (ASX:HAW) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Hawthorn Resources
When Might Hawthorn Resources Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Hawthorn Resources last reported its balance sheet in December 2021, it had zero debt and cash worth AU$11m. Looking at the last year, the company burnt through AU$2.2m. That means it had a cash runway of about 4.9 years as of December 2021. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Is Hawthorn Resources' Cash Burn Changing Over Time?
In our view, Hawthorn Resources doesn't yet produce significant amounts of operating revenue, since it reported just AU$18k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Over the last year its cash burn actually increased by a very significant 97%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Admittedly, we're a bit cautious of Hawthorn Resources 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 Hawthorn Resources Raise Cash?
Given its cash burn trajectory, Hawthorn Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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 and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).