RE:RE:Corporate Update - ESMYou do not need to have a business degree to know that a company that does not have any operating revenue needs to minimize cash burn so as not to dilute shareholders with excessive private placements. For this reason, under no circumstance should a $250,000 bonus be paid for the completion of the feasibility study. Directors should purchase shares, just like every other shareholder, if they want to benefit from this de-risking event. It is therefore imperative that Scott Moore needs to be fired before this bonus is paid. Scott Moore is not fit to be the CEO and President of this company. It is time that shareholders take action and express their concerns about the management of this company to the Board of Directors. They are accountable for the CEO’s performance so if enough shareholders complain then maybe they will do something about it. Although the following article was written last May, it expresses what investors think about the reputation of this company that is reflected in its dismal share price.
Here's Why We're A Bit Worried About Euro Sun Mining's (TSE:ESM) Cash Burn Situation
Simply Wall St
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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for
Euro Sun Mining (TSE:ESM) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Euro Sun Mining Have A Long 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. In March 2020, Euro Sun Mining had US$966k in cash, and was debt-free. Looking at the last year, the company burnt through US$6.4m. That means it had a cash runway of around 2 months as of March 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.
TSX:ESM Historical Debt May 14th 2020
How Is Euro Sun Mining's Cash Burn Changing Over Time?
Because Euro Sun Mining isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Euro Sun Mining makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Euro Sun Mining Raise Cash?
While its cash burn is only increasing slightly, Euro Sun Mining shareholders should still consider the potential need for further cash, down the track. 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).
Euro Sun Mining's cash burn of US$6.4m is about 21% of its US$31m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Euro Sun Mining's Cash Burn?
There are no prizes for guessing that we think Euro Sun Mining's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. And although we accept its increasing cash burn wasn't as worrying as its cash runway, it was still a real negative; as indeed were all the factors we considered in this article. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon.
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.