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Benton Resources (CVE:BEX) Is Very Risky Based On Its Cash Burn

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Benton Resources (CVE:BEX) shareholders be worried about its cash burn? For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business's cash, relative to its cash burn.

View our latest analysis for Benton Resources

Does Benton Resources Have A Long Cash Runway?

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. In December 2019, Benton Resources had CA$1.5m in cash, and was debt-free. Importantly, its cash burn was CA$4.5m over the trailing twelve months. That means it had a cash runway of around 4 months as of December 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. You can see how its cash balance has changed over time in the image below.

TSXV:BEX Historical Debt, February 22nd 2020
TSXV:BEX Historical Debt, February 22nd 2020

How Hard Would It Be For Benton Resources To Raise More Cash For Growth?

Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Benton Resources has a market capitalisation of CA$7.8m and burnt through CA$4.5m last year, which is 58% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

So, Should We Worry About Benton Resources's Cash Burn?

Given it's an early stage company, we don't have a lot of data with which to judge Benton Resources's cash burn. Having said that, we can say that its cash runway was a real negative. Overall, we're left with the impression that it may have trouble maintaining its cash burn and with uncertainty around the pay off, we'd probably try to avoid the stock. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Benton Resources insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

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