There is no doubt that money can be made by owning shares of unprofitable companies. For exemple, Resources of the Great Bear (CVE: GBR) has seen its share price rise 380% over the past year, delighting many shareholders. But while history praises these rare successes, those that fail are often forgotten; who remembers Pets.com?
Given the strong performance of its share price, we believe it is worthwhile for the shareholders of Great Bear Resources to consider whether its consumption of cash is of concern. For the purposes of this article, cash consumption is the annual rate at which an unprofitable business spends money to finance its growth; its negative free cash flow. We will start by comparing its cash consumption with its cash reserves in order to calculate its cash flow track.
Does Great Bear Resources have a long cash trail?
A company’s cash flow trail is the time it would take to deplete its cash reserves at its current rate of cash consumption. When Great Bear Resources last published its balance sheet in December 2019, it had no debt and cash worth C $ 30 million. In the past year, its cash consumption amounted to C $ 15 million. So there was a cash trail of around 2.0 years from December 2019. While this cash trail was not too much of a concern, sane holders would look into the distance and think about what would happen if the company was running out of cash. You can see how her cash balance has changed over time in the image below.
How does Great Bear Resources’ silver consumption change over time?
Since Great Bear Resources is not currently generating any income, we consider it a start-up. So while we can’t look at sales to understand growth, we can look at changes in cash consumption to understand changes in expenses over time. In fact, it has sharply increased its spending over the past year, increasing cash consumption by 200%. It’s fair to say that some sort of rate of increase cannot be sustained for very long without putting pressure on the balance sheet. Great Bear Resources is making us a little nervous due to its lack of substantial operating income. We prefer most stocks on that list of stocks that analysts expect to grow.
Can Great Bear Resources easily raise more money?
Given its cash-consuming trajectory, Great Bear Resources shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Generally speaking, a listed company can raise new liquidity by issuing shares or going into debt. Usually, a company itself will sell new stocks to raise funds to stimulate growth. We can compare a company’s cash consumption to its market capitalization to get an idea of how many new shares a company would need to issue to fund its one-year operations.
Great Bear Resources’ cash consumption of C $ 15 million represents approximately 2.9% of its market capitalization of C $ 531 million. This means that he could easily issue a few stocks to fund more growth and may well be able to borrow more cheaply.
How risky is Great Bear Resources’ cash position?
Even though its growing consumption of cash makes us a little nervous, we are forced to mention that we thought Great Bear Resources’ consumption of cash relative to its market capitalization was relatively promising. Businesses that burn money are always on the riskier side of things, but after looking at all the factors discussed in this short article, we aren’t too concerned about its rate of cash consumption. It is important for readers to be aware of the risks that can affect business operations, and we have selected 3 Warning Signs for Great Bear Resources that investors need to know when investing in stocks.
Sure, 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 growth stocks (according to analysts’ forecasts)
If you spot an error that needs to be corrected, please contact the editor at [email protected] This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the mentioned stocks.
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