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. Indeed, De Grey Mining (ASX:DEG) stock is up 260% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So notwithstanding the buoyant share price, we think it’s well worth asking whether De Grey Mining’s cash burn is too risky. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
When Might De Grey Mining Run Out Of Money?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. In December 2020, De Grey Mining had AU$104m in cash, and was debt-free. In the last year, its cash burn was AU$37m. Therefore, from December 2020 it had 2.8 years of cash runway. Arguably, that’s a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Is De Grey Mining’s Cash Burn Changing Over Time?
Whilst it’s great to see that De Grey Mining has already begun generating revenue from operations, last year it only produced AU$375k, so we don’t think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. Remarkably, it actually increased its cash burn by 206% 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. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can De Grey Mining Raise More Cash Easily?
While De Grey Mining does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Since it has a market capitalisation of AU$2.0b, De Grey Mining’s AU$37m in cash burn equates to about 1.9% of its market value. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
How Risky Is De Grey Mining’s Cash Burn Situation?
It may already be apparent to you that we’re relatively comfortable with the way De Grey Mining is burning through its cash. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Considering all the factors discussed in this article, we’re not overly concerned about the company’s cash burn, although we do think shareholders should keep an eye on how it develops. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for De Grey Mining (2 are potentially serious!) that you should be aware of before investing here.
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)
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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