Yahoo Finance We're Keeping An Eye On Zenith Minerals' (ASX:ZNC) Cash Burn Rate
We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Zenith Minerals (ASX:ZNC) shareholders 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'.
Check out our latest analysis for Zenith Minerals
How Long Is Zenith Minerals' 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. In June 2023, Zenith Minerals had AU$6.6m in cash, and was debt-free. Looking at the last year, the company burnt through AU$6.4m. So it had a cash runway of approximately 12 months from June 2023. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Is Zenith Minerals' Cash Burn Changing Over Time?
In our view, Zenith Minerals doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.7m in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 12% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Zenith Minerals To Raise More Cash For Growth?
While Zenith Minerals 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. 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).
Zenith Minerals' cash burn of AU$6.4m is about 13% of its AU$48m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Zenith Minerals' Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Zenith Minerals' cash burn relative to its market cap was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Zenith Minerals (of which 1 makes us a bit uncomfortable!) you should know about.
Of course Zenith Minerals may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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.
