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. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we’d take a look at whether Canadian North Resources (CVE:CNRI) shareholders should be worried about its 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Does Canadian North Resources Have A Long 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. When Canadian North Resources last reported its balance sheet in December 2022, it had zero debt and cash worth CA$11m. Importantly, its cash burn was CA$17m over the trailing twelve months. Therefore, from December 2022 it had roughly 8 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 Canadian North Resources’ Cash Burn Changing Over Time?
Although Canadian North Resources reported revenue of CA$92k last year, it didn’t actually have any revenue from operations. To us, that makes it a pre-revenue company, so we’ll look to its cash burn trajectory as an assessment of its cash burn situation. Remarkably, it actually increased its cash burn by 222% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Canadian North Resources makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Canadian North Resources Raise Cash?
Since its cash burn is moving in the wrong direction, Canadian North Resources shareholders may wish to think ahead to when the company may need to raise more cash. 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. 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.
Canadian North Resources’ cash burn of CA$17m is about 6.4% of its CA$268m market capitalisation. 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.
How Risky Is Canadian North Resources’ Cash Burn Situation?
On this analysis of Canadian North Resources’ cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Canadian North Resources’ cash burn is a risk, based on the factors we mentioned in this article. On another note, Canadian North Resources has 3 warning signs (and 2 which don’t sit too well with us) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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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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