We can easily understand why investors are drawn to unprofitable companies. For exemple, Kalamazoo Resources (ASX: KZR) saw its share price rise 109% last year, delighting many shareholders. That said, unprofitable businesses are risky as they could potentially burn all their money and become in trouble.
So despite the stock price surge, we think it’s worth considering whether Kalamazoo Resources’ cash consumption is too risky. its negative free cash flow. Let’s start with a review of the company’s cash flow, relative to its cash consumption.
Check out our latest analysis of Kalamazoo resources
When might Kalamazoo’s resources run out of money?
You can calculate a business’s cash flow trail by dividing the amount of cash it has by the rate at which it spends that money. When Kalamazoo Resources last published its balance sheet in June 2020, it had no debt and cash worth AU $ 8.9 million. Looking at last year, the company burned A $ 4.5 million. This means he had a cash trail of around 2.0 years as of June 2020. It’s not that bad, but it’s fair to say that the end of the cash trail is in sight, at less than cash consumption decreases significantly. Below you can see how its cash flow has evolved over time.
How does Kalamazoo Resources’ cash consumption change over time?
Kalamazoo Resources has not recorded any revenue over the past year, indicating that it is a start-up company that is still expanding its business. So even though we can’t look to sales to understand growth, we can see how cash consumption changes to understand how spending changes over time. Over the past year, its cash consumption actually increased by 89%. Often times, an increase in cash consumption just means that a business is speeding up its business development, but it should always be kept in mind that this results in a reduction in the cash flow trail. Kalamazoo Resources is making us a little nervous due to its lack of substantial operating income. So we would generally prefer stocks from this list of stocks that analysts expect to grow.
How easily can Kalamazoo’s resources raise cash?
While Kalamazoo Resources has a strong cash trail, its cash-consuming trajectory may cause some shareholders to reflect on when the company may need to raise more cash. In general, a listed company can raise new liquidity by issuing shares or going into debt. One of the main advantages of publicly traded companies is that they can sell stocks to investors to raise cash and finance growth. By looking at a company’s cash consumption relative to its market capitalization, we gain insight into shareholder dilution if the company needed to raise enough cash to cover another year’s cash consumption.
Kalamazoo Resources has a market capitalization of A $ 78 million and burned A $ 4.5 million last year, or 5.8% of the company’s market value. It’s a small proportion, so we think the company would be able to raise more cash to fund growth, with a little dilution, or even just borrow money.
So, should we be worried about Kalamazoo Resources’ cash consumption?
On this analysis of Kalamazoo Resources’ cash consumption, we think its cash consumption relative to its market capitalization was reassuring, while its growing cash consumption worries us a bit. Considering all of the factors covered in this article, we’re not overly concerned about the company’s cash consumption, although we do believe shareholders should keep an eye on its development. By deepening the risks, we identified 2 warning signs for Kalamazoo Resources which you should be aware of before investing.
Of course, you might find a fantastic investment looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of stock growth stocks (as predicted by analysts)
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