Just because a business does not make any money, does not mean that the stock will go down. By way of example, Sun Summit Minerals (CVE:SMN) has seen its share price rise 163% over the last year, delighting many shareholders. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
In light of its strong share price run, we think now is a good time to investigate how risky Sun Summit Minerals' 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Sun Summit Minerals' Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In February 2021, Sun Summit Minerals had CA$2.7m in cash, and was debt-free. Importantly, its cash burn was CA$3.3m over the trailing twelve months. Therefore, from February 2021 it had roughly 10 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. You can see how its cash balance has changed over time in the image below.
How Is Sun Summit Minerals' Cash Burn Changing Over Time?
Because Sun Summit Minerals 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 267%. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Sun Summit Minerals makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Sun Summit Minerals Raise Cash?
Given its cash burn trajectory, Sun Summit Minerals shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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 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).
Sun Summit Minerals' cash burn of CA$3.3m is about 6.8% of its CA$48m 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 Sun Summit Minerals' Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Sun Summit Minerals' cash burn relative to its market cap was relatively promising. Summing up, we think the Sun Summit Minerals' cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we've spotted 5 warning signs for Sun Summit Minerals you should be aware of, and 3 of them shouldn't be ignored.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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