Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for Kodiak Copper (CVE:KDK) 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’. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
See our latest analysis for Kodiak Copper
How Long Is Kodiak Copper’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Kodiak Copper last reported its June 2024 balance sheet in August 2024, it had zero debt and cash worth CA$8.4m. Importantly, its cash burn was CA$9.4m over the trailing twelve months. That means it had a cash runway of around 11 months as of June 2024. Notably, however, the one analyst we see covering the stock thinks that Kodiak Copper will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Is Kodiak Copper’s Cash Burn Changing Over Time?
Because Kodiak Copper isn’t currently generating revenue, we consider it an early-stage business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. As it happens, the company’s cash burn reduced by 11% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Kodiak Copper 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 Kodiak Copper 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. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Kodiak Copper’s cash burn of CA$9.4m is about 25% of its CA$38m market capitalisation. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
How Risky Is Kodiak Copper’s Cash Burn Situation?
It may already be apparent to you that we’re relatively comfortable with the way Kodiak Copper is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. While its cash runway wasn’t great, the other factors mentioned in this article more than make up for weakness on that measure. There’s no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. On another note, Kodiak Copper has 4 warning signs (and 2 which are significant) we think you should know about.
Of course Kodiak Copper 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 with high insider ownership.
Valuation is complex, but we’re here to simplify it.
Discover if Kodiak Copper might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.