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Just because a business does not make any money, does not mean that the stock will go down. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Southern Alliance Mining (Catalist:QNS) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Southern Alliance Mining
When Might Southern Alliance Mining Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When Southern Alliance Mining last reported its January 2024 balance sheet in March 2024, it had zero debt and cash worth RM151m. Looking at the last year, the company burnt through RM18m. So it had a cash runway of about 8.2 years from January 2024. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Well Is Southern Alliance Mining Growing?
Southern Alliance Mining managed to reduce its cash burn by 71% over the last twelve months, which suggests it's on the right flight path. Pleasingly, this was achieved with the help of a 24% boost to revenue. It seems to be growing nicely. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Southern Alliance Mining has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Southern Alliance Mining To Raise More Cash For Growth?
While Southern Alliance Mining seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).