Yahoo Finance Can Caravel Minerals (ASX:CVV) Afford To Invest In Growth?
There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Caravel Minerals (ASX:CVV) shareholders should be worried about its 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'.
See our latest analysis for Caravel Minerals
When Might Caravel Minerals Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2018, Caravel Minerals had cash of AU$815k and no debt. Importantly, its cash burn was AU$2.7m over the trailing twelve months. So it had a cash runway of approximately 4 months from December 2018. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.
How Is Caravel Minerals's Cash Burn Changing Over Time?
Whilst it's great to see that Caravel Minerals has already begun generating revenue from operations, last year it only produced AU$41k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by a very significant 92%. 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 Caravel Minerals 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 Caravel Minerals Raise Cash?
Since its cash burn is moving in the wrong direction, Caravel Minerals shareholders may wish to think ahead to when the company may need to raise more cash. 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.
Caravel Minerals has a market capitalisation of AU$6.9m and burnt through AU$2.7m last year, which is 39% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
Is Caravel Minerals's Cash Burn A Worry?
There are no prizes for guessing that we think Caravel Minerals's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its cash burn relative to its market cap is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Caravel Minerals insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
