Parkway Minerals (ASX: PWN) is in a good position to deliver on its growth plans
Just because a company isn’t making money doesn’t mean its stock will go down. For example, Parkway minerals (ASX: PWN) shareholders did very well last year, with the share price rising 357%. But the harsh reality is that a great many companies that lose money burn all their money and go bankrupt.
So regardless of the buoyant stock price, we should be wondering whether Parkway Minerals’ cash burn is too risky. In this report, we look at the company’s negative annual free cash flow and refer to it as “cash burn”. The first step is to compare your cash burn with your cash reserves to give us your cash runway.
Does Parkway Minerals have a long cash runway?
A cash runway is defined as the time it would take for a company to run out of money if it were to keep spending at its current cash burn rate. As of December 2020, Parkway Minerals had cash of AU $ 4.9 million and no debt. If you look at the last year, the company burned AU $ 2.0 million. So it had a cash runway of around 2.5 years as of December 2020. That is arguably a prudent and reasonable length of the runway. Shown below, you can see how cash levels have changed over time.
How does Parkway Minerals’ cash burn change over time?
While Parkway Minerals was recording legally Revenue of AUD 13,000 last year, no revenue operation. That means we’ll be viewing it as a pre-sales business and will focus our growth analysis on cash burn for now. The skyrocketing cash burn of 107% year-on-year is sure to put our nerves to the test. This type of spending growth cannot last very long before it generally causes balance sheet weakness. Parkway Minerals makes us a little nervous as there is no significant operating income. We prefer most stocks on this list of stocks that analysts expect to grow.
Can Parkway Minerals Easily Bring In More Money?
While Parkway Minerals has a solid cash history, its cash burn trajectory could make some shareholders think ahead about when the company might need to raise more cash. In general, a public company can raise new money by issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn with its total market capitalization, we can roughly estimate how many shares it would have to issue to run the company for another year (with the same burn rate).
Parkway Minerals has a market capitalization of AU $ 43 million and burned AU $ 2.0 million in the past year, which is 4.6% of the company’s market value. Since this is a rather small percentage, it would likely be very easy for the company to fund another year’s growth by issuing new shares to investors or even taking out a loan.
Is Parkway Minerals Cash Burn a Problem?
As you can probably see by now, we’re not too concerned about Parkway Minerals’ money usage. For example, we believe that its cash burn relative to market cap suggests that the company is on the right track. While we find the increasing cash burn to be somewhat negative, the bigger picture is one that we are comfortable with when we look at the other metrics mentioned in this article together. Based on the factors mentioned in this article, we believe the cash burn situation deserves some attention from shareholders, but we think they shouldn’t be concerned. In addition, we conducted an in-depth investigation of the company and identified 5 warning signs for Parkway Minerals (2 are a little worrisome!) To consider before investing here.
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