We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Wildcat Resources (ASX:WC8) shareholders 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). Let's start with an examination of the business' cash, relative to its cash burn.
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How Long Is Wildcat Resources' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Wildcat Resources had cash of AU$5.3m and no debt. In the last year, its cash burn was AU$2.1m. Therefore, from December 2022 it had 2.6 years of cash runway. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Is Wildcat Resources' Cash Burn Changing Over Time?
Although Wildcat Resources reported revenue of AU$122 last year, it didn't actually have any revenue from operations. To us, that makes it a pre-revenue company, so we'll look to its cash burn trajectory as an assessment of its cash burn situation. With the cash burn rate up 7.4% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. Wildcat 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.
Can Wildcat Resources Raise More Cash Easily?
Since its cash burn is increasing (albeit only slightly), Wildcat Resources shareholders should still be mindful of the possibility it will require 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. 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).