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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 should Kogi Iron (ASX:KFE) shareholders 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is Kogi Iron's Cash Runway?
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. When Kogi Iron last reported its balance sheet in June 2020, it had zero debt and cash worth AU$1.4m. In the last year, its cash burn was AU$2.3m. Therefore, from June 2020 it had roughly 7 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. The image below shows how its cash balance has been changing over the last few years.
How Is Kogi Iron's Cash Burn Changing Over Time?
In our view, Kogi Iron doesn't yet produce significant amounts of operating revenue, since it reported just AU$13k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 15% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Admittedly, we're a bit cautious of Kogi Iron 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 Hard Would It Be For Kogi Iron To Raise More Cash For Growth?
While Kogi Iron is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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. 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.
Kogi Iron has a market capitalisation of AU$28m and burnt through AU$2.3m last year, which is 8.4% of the company's 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.
So, Should We Worry About Kogi Iron's Cash Burn?
On this analysis of Kogi Iron's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Summing up, we think the Kogi Iron's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for Kogi Iron (3 can'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 interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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