Yahoo Finance Is Kairos Minerals (ASX:KAI) In A Good Position To Deliver On Growth Plans?
We can readily understand why investors are attracted to unprofitable companies. 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, the natural question for Kairos Minerals (ASX:KAI) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.
See our latest analysis for Kairos Minerals
When Might Kairos Minerals Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Kairos Minerals last reported its balance sheet in December 2021, it had zero debt and cash worth AU$5.1m. Looking at the last year, the company burnt through AU$7.7m. Therefore, from December 2021 it had roughly 8 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Kairos Minerals' Cash Burn Changing Over Time?
Kairos Minerals didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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. With the cash burn rate up 49% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Kairos Minerals 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 Kairos Minerals To Raise More Cash For Growth?
Given its cash burn trajectory, Kairos Minerals shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Kairos Minerals has a market capitalisation of AU$55m and burnt through AU$7.7m last year, which is 14% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How Risky Is Kairos Minerals' Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Kairos Minerals' cash burn relative to its market cap was relatively promising. Summing up, we think the Kairos Minerals' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Kairos Minerals (of which 2 are potentially serious!) you should know about.
Of course Kairos Minerals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
