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We can readily understand why investors are attracted to unprofitable companies. By way of example, Rio2 (CVE:RIO) has seen its share price rise 129% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So notwithstanding the buoyant share price, we think it's well worth asking whether Rio2's cash burn is too risky. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Rio2 Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2024, Rio2 had cash of US$45m and no debt. Importantly, its cash burn was US$16m over the trailing twelve months. Therefore, from December 2024 it had 2.7 years of cash runway. Importantly, though, analysts think that Rio2 will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.
See our latest analysis for Rio2
Can Rio2 Raise More Cash Easily?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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 US$320m, Rio2's US$16m in cash burn equates to about 5.1% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is Rio2's Cash Burn A Worry?
Because Rio2 is an early stage company, we don't have a great deal of data on which to form an opinion of its cash burn. We would undoubtedly be more comfortable if it had reported some operating revenue. However, it is fair to say that its cash runway gave us comfort. Overall, we think its cash burn seems perfectly reasonable, and we are not concerned by it. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Rio2 that potential shareholders should take into account before putting money into a stock.