There’s no doubt that money can be made by owning shares of unprofitable businesses. Indeed, Nova Minerals (ASX:NVA) stock is up 114% 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.
Given its strong share price performance, we think it’s worthwhile for Nova Minerals shareholders to consider whether its cash burn is concerning. 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 Nova Minerals
How Long Is Nova Minerals’s Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2019, Nova Minerals had cash of AU$1.6m and no debt. In the last year, its cash burn was AU$4.4m. Therefore, from December 2019 it had roughly 4 months of cash runway. That’s a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.
ASX:NVA Historical Debt April 14th 2020
How Is Nova Minerals’s Cash Burn Changing Over Time?
Although Nova Minerals reported revenue of AU$79k last year, it didn’t actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. Nova Minerals makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For Nova Minerals To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Nova Minerals to raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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).
Nova Minerals has a market capitalisation of AU$31m and burnt through AU$4.4m last year, which is 14% of the company’s market value. 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.
So, Should We Worry About Nova Minerals’s Cash Burn?
On this analysis of Nova Minerals’s cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. Taking a deeper dive, we’ve spotted 7 warning signs for Nova Minerals you should be aware of, and 3 of them are concerning.
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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