We're Hopeful That Western Copper and Gold (TSE:WRN) Will Use Its Cash Wisely
BySimply Wall StPublishedMarch 02, 2022
The natural question for Western Copper and Gold (TSE:WRN) 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 Western Copper and Gold Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Western Copper and Gold last reported its balance sheet in September 2021, it had zero debt and cash worth CA$52m. Importantly, its cash burn was CA$12m over the trailing twelve months. So it had a cash runway of about 4.3 years from September 2021.
How Is Western Copper and Gold's Cash Burn Changing Over Time?
Western Copper and Gold didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Over the last year its cash burn actually increased by a very significant 84%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Clearly, however, the crucial factor is whether the company will grow its business going forward.
How Hard Would It Be For Western Copper and Gold To Raise More Cash For Growth?
While Western Copper and Gold does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth.
By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Western Copper and Gold has a market capitalisation of CA$351m and burnt through CA$12m last year, which is 3.5% of the company's market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Western Copper and Gold's Cash Burn Situation?
As you can probably tell by now, we're not too worried about Western Copper and Gold's cash burn. For example, we think its cash runway suggests that the company is on a good path. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs.