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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should NxGold (CVE:NXN) 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’. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might NxGold Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When NxGold last reported its balance sheet in September 2019, it had zero debt and cash worth CA$2.3m. In the last year, its cash burn was CA$1.6m. Therefore, from September 2019 it had roughly 18 months of cash runway. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Is NxGold’s Cash Burn Changing Over Time?
Because NxGold 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 may be good for protecting the balance sheet but it hardly points to imminent growth. Admittedly, we’re a bit cautious of NxGold due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can NxGold Raise Cash?
There’s no doubt NxGold’s 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to 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.
NxGold’s cash burn of CA$1.6m is about 78% of its CA$2.0m market capitalisation. That’s very high expenditure relative to the company’s size, suggesting it is an extremely high risk stock.
Is NxGold’s Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought NxGold’s cash burn reduction was relatively promising. Summing up, we think the NxGold’s cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that NxGold insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
