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We Think King River Resources (ASX:KRR) Can Afford To Drive Business Growth

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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for King River Resources (ASX:KRR) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for King River Resources

How Long Is King River Resources' Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In December 2020, King River Resources had AU$7.3m in cash, and was debt-free. In the last year, its cash burn was AU$3.1m. Therefore, from December 2020 it had 2.4 years of cash runway. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
debt-equity-history-analysis

How Is King River Resources' Cash Burn Changing Over Time?

Although King River Resources had revenue of AU$53k in the last twelve months, its operating revenue was only AU$1.8k in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. With cash burn dropping by 8.0% it seems management feel the company is spending enough to advance its business plans at an appropriate pace. Admittedly, we're a bit cautious of King River Resources due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can King River Resources Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for King River Resources to raise more cash in the future. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of AU$40m, King River Resources' AU$3.1m in cash burn equates to about 7.6% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is King River Resources' Cash Burn A Worry?

As you can probably tell by now, we're not too worried about King River Resources' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn't too bad! Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 6 warning signs for King River Resources (of which 3 are a bit concerning!) you should know about.

Of course King River Resources 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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