There's no doubt that money can be made by owning shares of unprofitable businesses. 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 Golden Mile Resources (ASX:G88) 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.

Check out our latest analysis for Golden Mile Resources

How Long Is Golden Mile Resources's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Golden Mile Resources last reported its balance sheet in December 2019, it had zero debt and cash worth AU$896k. Importantly, its cash burn was AU$1.6m over the trailing twelve months. That means it had a cash runway of around 7 months as of December 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Is Golden Mile Resources's Cash Burn Changing Over Time?

Because Golden Mile Resources isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. As it happens, the company's cash burn reduced by 39% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we're a bit cautious of Golden Mile Resources due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can Golden Mile Resources Raise Cash?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Golden Mile Resources to raise more cash in the future. 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 to 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.

Since it has a market capitalisation of AU$1.8m, Golden Mile Resources's AU$1.6m in cash burn equates to about 89% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

How Risky Is Golden Mile Resources's Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Golden Mile Resources's cash burn. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. On the other hand at least it could boast rather strong cash burn reduction, which no doubt gives shareholders some comfort. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Taking a deeper dive, we've spotted 5 warning signs for Golden Mile Resources you should be aware of, and 2 of them can't be ignored.

Of course Golden Mile Resources may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.

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. Thank you for reading.