Just because a company isn’t making money doesn’t mean the stock will fall. For example, although Amazon.com was loss-making for many years after it went public, if you had bought and held the stock since 1999, you would have made a fortune. The harsh reality, however, is that a great many loss-making companies burn through all their cash and go bankrupt.

The natural question for North Peak Resources (CVE:NPR) 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 looking at the company’s cash holdings relative to its cash burn.

Check out our latest analysis for North Peak Resources

How long is North Peak Resources’ cash reserve?

A company’s cash runway is the amount of time it would take to burn through its cash reserves at the current cash burn rate. As of March 2024, North Peak Resources had CA$4.2 million in cash and no debt. Over the last year, the company burned CA$5.4 million, so as of March 2024, it had a cash runway of about 9 months. Frankly, that kind of short runway makes us nervous because it suggests the company needs to significantly reduce its cash burn or else raise cash shortly. You can see how its cash holdings have changed over time in the image below.

How does North Peak Resources’ cash burn change over time?

Since North Peak Resources is not currently generating revenue, we consider it an early-stage company. Nevertheless, we can look at the evolution of its cash burn consumption as part of our assessment of its cash burn situation. The rapid 126% year-over-year increase in cash burn is certainly a nerve-racking one for us. This kind of growth in expenses cannot continue for very long before it leads to weakness in the balance sheet in general. North Peak Resources is a bit of a concern for us due to its lack of operating revenue. Therefore, we generally prefer stocks from this list of stocks where analysts are forecasting growth.

How difficult would it be for North Peak Resources to raise more money for growth?

With cash burn heading in the wrong direction, North Peak Resources shareholders should think ahead to when the company may need to raise more cash. Generally speaking, a publicly traded company can raise new money by issuing shares or taking on debt. One of the key advantages of publicly traded companies is that they can sell shares to investors to raise money and fund growth. By looking at a company’s cash burn relative to its market capitalization, we can gain insight into how diluted shareholders would be if the company had to raise enough money to cover another year’s worth of cash burn.

North Peak Resources’ cash burn of $5.4 million represents about 17% of its market cap of $31 million, so we believe the company could easily raise more cash for growth, albeit at the cost of some dilution.

So should we be worried about North Peak Resources’ cash burn?

While we are a little concerned about the rising cash burn, we must mention that we found North Peak Resources’ cash burn relative to its market capitalization to be relatively promising. In summary, we believe North Peak Resources’ cash burn is a risk due to the factors mentioned in this article. Upon closer inspection, we found the following: 5 warning signs for North Peak Resources You should be aware of these, and three 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 interesting companies and this list of growth stocks (according to analyst forecasts)

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