We're Hopeful That Prodigy Gold (ASX:PRX) Will Use Its Cash Wisely

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 should Prodigy Gold (ASX:PRX) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Prodigy Gold

When Might Prodigy Gold Run Out Of Money?

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. In December 2020, Prodigy Gold had AU$8.6m in cash, and was debt-free. Looking at the last year, the company burnt through AU$3.9m. That means it had a cash runway of about 2.2 years as of December 2020. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.

How Is Prodigy Gold's Cash Burn Changing Over Time?

Because Prodigy Gold isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Even though it doesn't get us excited, the 25% reduction in cash burn year on year does suggest the company can continue operating for quite some time. Prodigy Gold makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Prodigy Gold Raise Cash?

While Prodigy Gold is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. 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 and 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.

Prodigy Gold's cash burn of AU$3.9m is about 14% of its AU$28m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

How Risky Is Prodigy Gold's Cash Burn Situation?

The good news is that in our view Prodigy Gold's cash burn situation gives shareholders real reason for optimism. Not only was its cash burn reduction quite good, but its cash runway was a real positive. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking an in-depth view of risks, we've identified 1 warning sign for Prodigy Gold that you should be aware of before investing.

Of course Prodigy Gold 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.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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