Companies Like Tinka Resources (CVE:TK) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we’d take a look at whether Tinka Resources (CVE:TK) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let’s start with an examination of the business’ cash, relative to its cash burn.

Check out our latest analysis for Tinka Resources

Does Tinka Resources Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2022, Tinka Resources had CA$11m in cash, and was debt-free. In the last year, its cash burn was CA$5.2m. That means it had a cash runway of about 2.1 years as of June 2022. Arguably, that’s a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis

How Is Tinka Resources’ Cash Burn Changing Over Time?

Because Tinka Resources 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. Even though it doesn’t get us excited, the 37% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Tinka Resources makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Tinka Resources Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Tinka Resources to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.

Since it has a market capitalisation of CA$51m, Tinka Resources’ CA$5.2m in cash burn equates to about 10% of its market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

How Risky Is Tinka Resources’ Cash Burn Situation?

It may already be apparent to you that we’re relatively comfortable with the way Tinka Resources is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even though its cash burn reduction wasn’t quite as impressive, it was still a positive. 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, Tinka Resources has 3 warning signs (and 1 which is significant) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here

Leave a Reply

Your email address will not be published.