Companies Like BIGG Digital Assets (CNSX:BIGG) Can Be Considered Quite Risky

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for BIGG Digital Assets (CNSX:BIGG) shareholders is whether they should be concerned by its rate of 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for BIGG Digital Assets

When Might BIGG Digital Assets Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When BIGG Digital Assets last reported its balance sheet in June 2019, it had zero debt and cash worth CA$8.3m. Looking at the last year, the company burnt through CA$7.1m. Therefore, from June 2019 it had roughly 14 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Is BIGG Digital Assets's Cash Burn Changing Over Time?

In our view, BIGG Digital Assets doesn't yet produce significant amounts of operating revenue, since it reported just CA$101k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Admittedly, we're a bit cautious of BIGG Digital Assets due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can BIGG Digital Assets Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for BIGG Digital Assets to raise more cash in the future. 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).

BIGG Digital Assets has a market capitalisation of CA$5.7m and burnt through CA$7.1m last year, which is 124% of the company's market value. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

Is BIGG Digital Assets's Cash Burn A Worry?

Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought BIGG Digital Assets's cash runway was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that BIGG Digital Assets insiders have been trading shares in the company. Click here to find out if they 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 interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.