Simply Wall St

Will Kore Potash (LON:KP2) Spend Its Cash Wisely?

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We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Kore Potash (LON:KP2) 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’. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Kore Potash

How Long Is Kore Potash’s Cash Runway?

A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2022, Kore Potash had cash of US$7.6m and no debt. In the last year, its cash burn was US$6.2m. That means it had a cash runway of around 15 months as of June 2022. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
AIM:KP2 Debt to Equity History October 20th 2022

How Is Kore Potash’s Cash Burn Changing Over Time?

Kore Potash didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 24% over the last year suggests some degree of prudence. Admittedly, we’re a bit cautious of Kore Potash 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 Hard Would It Be For Kore Potash To Raise More Cash For Growth?

While Kore Potash 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Kore Potash’s cash burn of US$6.2m is about 19% of its US$32m 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.

Is Kore Potash’s Cash Burn A Worry?

The good news is that in our view Kore Potash’s cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash runway, while on the other it can also boast very strong cash burn reduction. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Kore Potash (of which 1 is potentially serious!) you should know about.

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)

Valuation is complex, but we’re helping make it simple.

Find out whether Kore Potash is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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