Yahoo Finance Here's Why Gatling Exploration (CVE:GTR) Must Play Its Cards Just Right
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. 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 Gatling Exploration (CVE:GTR) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; 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 Gatling Exploration
When Might Gatling Exploration Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, Gatling Exploration had CA$917k in cash, and was debt-free. Looking at the last year, the company burnt through CA$9.6m. That means it had a cash runway of under two months as of December 2019. To be frank we are alarmed by how short that cash runway is! The image below shows how its cash balance has been changing over the last few years.
How Is Gatling Exploration's Cash Burn Changing Over Time?
Because Gatling Exploration isn't currently generating revenue, we consider it an early-stage 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. Remarkably, it actually increased its cash burn by 225% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Gatling Exploration 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 Gatling Exploration To Raise More Cash For Growth?
Given its cash burn trajectory, Gatling Exploration shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 to 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.
Gatling Exploration's cash burn of CA$9.6m is about 71% of its CA$14m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Gatling Exploration's Cash Burn A Worry?
As you can probably tell by now, we're rather concerned about Gatling Exploration's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. And although we accept its cash burn relative to its market cap wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. Its cash burn burn situation feels about as relaxing as riding your bicycle home in the rain without so much as a jumper. The need for more cash seems just around the corner, and any dilution is likely to be rather severe. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Gatling Exploration (4 shouldn't be ignored!) that you should be aware of before investing here.
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)
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.
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