Cobra Resources (LON:COBR) Is Arguably In A Tricky Situation
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, the natural question for Cobra Resources (LON:COBR) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.
Check out our latest analysis for Cobra Resources
How Long Is Cobra Resources's Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Cobra Resources last reported its balance sheet in June 2019, it had zero debt and cash worth UK£3.1k. In the last year, its cash burn was UK£696k. So it seems to us it had a cash runway of less than two months from June 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.
How Easily Can Cobra Resources Raise Cash?
Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Cobra Resources's cash burn of UK£696k is about 80% of its UK£874k market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
Is Cobra Resources's Cash Burn A Worry?
Given it's an early stage company, we don't have a lot of data with which to judge Cobra Resources's cash burn. Having said that, we can say that its cash runway was a real negative. But from what we can see its cash burn is extremely high, and we certainly don't envy shareholders their position. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Cobra Resources CEO is paid..
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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