Yahoo Finance We're Not Very Worried About KGL Resources' (ASX:KGL) Cash Burn Rate
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. By way of example, KGL Resources (ASX:KGL) has seen its share price rise 306% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
In light of its strong share price run, we think now is a good time to investigate how risky KGL Resources' cash burn is. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for KGL Resources
When Might KGL Resources Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2020, KGL Resources had cash of AU$5.2m and no debt. Looking at the last year, the company burnt through AU$5.5m. Therefore, from December 2020 it had roughly 11 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Is KGL Resources' Cash Burn Changing Over Time?
Because KGL Resources isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. The 65% reduction in its cash burn over the last twelve months could be interpreted as a sign that management are worried about running out of cash. Admittedly, we're a bit cautious of KGL 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.
How Hard Would It Be For KGL Resources To Raise More Cash For Growth?
There's no doubt KGL Resources' rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
KGL Resources' cash burn of AU$5.5m is about 2.0% of its AU$271m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is KGL Resources' Cash Burn Situation?
On this analysis of KGL Resources' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway 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 KGL Resources' situation. Taking a deeper dive, we've spotted 4 warning signs for KGL Resources you should be aware of, and 2 of them make us uncomfortable.
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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