Genius Metals (CSE:GENI) Will Have To Spend Its Cash Wisely

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, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Genius Metals (CSE:GENI) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Genius Metals

How Long Is Genius Metals's Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Genius Metals last reported its balance sheet in January 2020, it had zero debt and cash worth CA$209k. Looking at the last year, the company burnt through CA$1.1m. So it had a cash runway of approximately 2 months from January 2020. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.

How Hard Would It Be For Genius Metals To Raise More Cash For Growth?

Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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).

Since it has a market capitalisation of CA$3.2m, Genius Metals's CA$1.1m in cash burn equates to about 33% of its market value. 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 Genius Metals's Cash Burn Situation?

Given it's an early stage company, we don't have a lot of data with which to judge Genius Metals's cash burn. However, it is fair to say that its cash runway made us nervous. But in truth we would avoid the stock as its cash burn seems rather high, and we simply don't know how it will continue to fund its spending. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Genius Metals (2 are concerning!) that you should be aware of before investing here.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

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