There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, Orosur Mining (TSE:OMI) shareholders have done very well over the last year, with the share price soaring by 789%. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
In light of its strong share price run, we think now is a good time to investigate how risky Orosur Mining’s cash burn is. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’ cash, relative to its cash burn.
When Might Orosur Mining Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at November 2020, Orosur Mining had cash of US$2.0m and no debt. Looking at the last year, the company burnt through US$2.5m. So it had a cash runway of approximately 10 months from November 2020. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Is Orosur Mining’s Cash Burn Changing Over Time?
Because Orosur Mining 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. As it happens, the company’s cash burn reduced by 51% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we’re a bit cautious of Orosur Mining 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 Easily Can Orosur Mining Raise Cash?
There’s no doubt Orosur Mining’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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Orosur Mining’s cash burn of US$2.5m is about 4.4% of its US$56m market capitalisation. 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 Orosur Mining’s Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Orosur Mining’s cash burn relative to its market cap was relatively promising. 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 Orosur Mining’s situation. On another note, Orosur Mining has 5 warning signs (and 1 which shouldn’t be ignored) 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 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.