Just because a business does not make any money, does not mean that the stock will go down. For example, American Manganese (CVE:AMY) shareholders have done very well over the last year, with the share price soaring by 322%. 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.
So notwithstanding the buoyant share price, we think it's well worth asking whether American Manganese'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. Let's start with an examination of the business' cash, relative to its cash burn.
When Might American Manganese Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In April 2021, American Manganese had CA$6.1m in cash, and was debt-free. In the last year, its cash burn was CA$1.6m. That means it had a cash runway of about 3.8 years as of April 2021. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.
How Is American Manganese's Cash Burn Changing Over Time?
American Manganese didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to...
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