Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we’d take a look at whether Nimy Resources (ASX:NIM) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let’s start with an examination of the business’ cash, relative to its cash burn.
When Might Nimy Resources Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Nimy Resources last reported its balance sheet in December 2021, it had zero debt and cash worth AU$5.7m. Looking at the last year, the company burnt through AU$1.5m. Therefore, from December 2021 it had 3.8 years of cash runway. There’s no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Is Nimy Resources’ Cash Burn Changing Over Time?
Because Nimy 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. Its cash burn positively exploded in the last year, up 257%. Given that sharp increase in spending, the company’s cash runway will shrink rapidly as it depletes its cash reserves. Admittedly, we’re a bit cautious of Nimy Resources 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 Hard Would It Be For Nimy Resources To Raise More Cash For Growth?
Given its cash burn trajectory, Nimy Resources shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. 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.
Nimy Resources has a market capitalisation of AU$37m and burnt through AU$1.5m last year, which is 4.2% 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 Nimy Resources’ Cash Burn?
It may already be apparent to you that we’re relatively comfortable with the way Nimy Resources is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. Taking a deeper dive, we’ve spotted 3 warning signs for Nimy Resources you should be aware of, and 1 of them makes us a bit 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)
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
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