Yahoo Finance Here's Why We're Not Too Worried About New World Resources' (ASX:NWC) Cash Burn Situation
There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, New World Resources (ASX:NWC) stock is up 914% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given its strong share price performance, we think it's worthwhile for New World Resources shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Check out our latest analysis for New World Resources
When Might New World Resources Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When New World Resources last reported its balance sheet in December 2020, it had zero debt and cash worth AU$10m. Importantly, its cash burn was AU$5.7m over the trailing twelve months. So it had a cash runway of approximately 21 months from December 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. You can see how its cash balance has changed over time in the image below.
How Is New World Resources' Cash Burn Changing Over Time?
In our view, New World Resources doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.6k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. During the last twelve months, its cash burn actually ramped up 90%. 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. New World 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 New World Resources Raise More Cash Easily?
Given its cash burn trajectory, New World Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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. 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.
Since it has a market capitalisation of AU$99m, New World Resources' AU$5.7m in cash burn equates to about 5.8% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is New World Resources' Cash Burn Situation?
On this analysis of New World Resources' cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about New World Resources' situation. Taking a deeper dive, we've spotted 5 warning signs for New World Resources you should be aware of, and 3 of them can't be ignored.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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