Yahoo Finance Here's Why We're Watching Rafaella Resources's (ASX:RFR) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Rafaella Resources (ASX:RFR) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Rafaella Resources
When Might Rafaella Resources Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Rafaella Resources last reported its balance sheet in June 2019, it had zero debt and cash worth AU$3.3m. Looking at the last year, the company burnt through AU$1.6m. So it had a cash runway of about 2.1 years from June 2019. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Is Rafaella Resources's Cash Burn Changing Over Time?
Whilst it's great to see that Rafaella Resources has already begun generating revenue from operations, last year it only produced AU$58k, 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. The skyrocketing cash burn up 169% year on year certainly tests our nerves. That sort of spending growth rate can't continue for very long before it causes balance sheet weakness, generally speaking. Rafaella 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 Rafaella Resources Raise More Cash Easily?
While Rafaella Resources does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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.
Rafaella Resources's cash burn of AU$1.6m is about 23% of its AU$6.7m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
So, Should We Worry About Rafaella Resources's Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Rafaella Resources's cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Rafaella Resources CEO receives in total remuneration.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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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