We can easily understand why investors are attracted to unprofitable companies. Biotechnology and mining companies, for example, often lose money for years before they succeed with a new treatment or mineral discovery. Yet while history celebrates these rare successes, the failures are often forgotten. Who remembers Pets.com?

Given this risk, we wanted to check whether KGL Resources (ASX:KGL) Shareholders should be concerned about cash burn. In this article, we define cash burn as annual (negative) free cash flow, which is the amount a company spends each year to fund its growth. Let’s start by examining the company’s cash holdings relative to its cash burn.

Check out our latest analysis for KGL Resources

How long is KGL Resources’ cash runway?

A company’s cash runway is calculated by dividing its cash holdings by its cash burn. When KGL Resources released its December 2023 balance sheet in March 2024, it had no debt and AU$14m worth of cash. Looking over the last year, the company burned through AU$14m, so it had a cash runway of roughly 12 months from December 2023. Frankly, that kind of short runway makes us nervous, as it suggests the company will have to significantly reduce its cash burn or else raise cash shortly. Below you can see how its cash holdings have changed over time.

How does KGL Resources’ cash burn change over time?

Since KGL Resources is not currently generating revenue, we consider it an early-stage company. Nevertheless, we can look at the evolution of its cash burn history as part of our assessment of its cash burn situation. Given the length of its cash runway, we would interpret the 25% reduction in cash burn over 12 months as prudent, if not necessary, for capital preservation. Admittedly, we are a little cautious on KGL Resources due to its lack of significant operating revenue. Therefore, we generally prefer stocks from this list of stocks where analysts are forecasting growth.

How easily can KGL Resources raise cash?

Even though cash burn has been reduced recently, shareholders should still consider how easy it would be for KGL Resources to raise more cash in the future. Generally speaking, a publicly traded company can raise new money by issuing shares or taking on debt. Typically, a company sells new shares to raise money and fuel growth. By looking at a company’s cash burn relative to its market capitalization, we get insights into how diluted shareholders would be if the company had to raise enough money to cover another year’s cash burn.

KGL Resources’ cash burn of AU$14 million is equivalent to about 23% of its AU$62 million market capitalization. That’s not insignificant, and at the current share price, if the company had to sell enough shares to fund another year’s growth, it would likely incur quite costly dilution.

Is KGL Resources’ cash burn a cause for concern?

After this analysis of KGL Resources’ cash burn, we find the reduction in cash burn reassuring, while the cash burn relative to market capitalization worries us a little. While we don’t believe the company has a problem with its cash burn, the analysis we have done in this article suggests shareholders should carefully consider the potential cost of raising more funds in the future. Upon closer inspection, we found that 4 warning signs for KGL Resources You should be aware of these, and two of them make us uncomfortable.

Naturally, If you look elsewhere, you may find a fantastic investment. So take a look at the free List of companies with significant insider holdings and this list of growth stocks (according to analyst forecasts)

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.