There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Monument Mining (CVE:MMY) shareholders is whether they should be concerned by its rate of cash burn. 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.
See our latest analysis for Monument Mining
How Long Is Monument Mining's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. Monument Mining has such a small amount of debt that we'll set it aside, and focus on the US$16m in cash it held at September 2022. Importantly, its cash burn was US$19m over the trailing twelve months. Therefore, from September 2022 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. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. The image below shows how its cash balance has been changing over the last few years.
How Well Is Monument Mining Growing?
One thing for shareholders to keep front in mind is that Monument Mining increased its cash burn by 202% in the last twelve months. While that's concerning on it's own, the fact that operating revenue was actually down 35% over the same period makes us positively tremulous. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. In reality, this article only makes a short study of the company's growth data. You can take a look at how Monument Mining has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Monument Mining Raise Cash?
Monument Mining revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).
Monument Mining's cash burn of US$19m is about 79% of its US$24m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
How Risky Is Monument Mining's Cash Burn Situation?
There are no prizes for guessing that we think Monument Mining's cash burn is a bit of a worry. Take, for example, its increasing cash burn, which suggests the company may have difficulty funding itself, in the future. And although we accept its cash runway wasn't as worrying as its increasing cash burn, it was still a real negative; as indeed were all the factors we considered in this article. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. On another note, Monument Mining has 4 warning signs (and 1 which is potentially serious) 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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