We Think GFG Resources (CVE:GFG) Needs To Drive Business Growth Carefully

Just because a business does not make any money, does not mean that the stock will go down. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for GFG Resources (CVE:GFG) 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). Let’s start with an examination of the business’ cash, relative to its cash burn.

See our latest analysis for GFG Resources

When Might GFG Resources Run Out Of Money?

A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When GFG Resources last reported its June 2024 balance sheet in October 2024, it had zero debt and cash worth CA$2.1m. Looking at the last year, the company burnt through CA$3.9m. So it had a cash runway of approximately 7 months from June 2024. 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 GFG Resources’ Cash Burn Changing Over Time?

Because GFG 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. It’s possible that the 7.6% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. Admittedly, we’re a bit cautious of GFG Resources 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 GFG Resources Raise Cash?

While GFG Resources 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company’s cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year’s operations.

Since it has a market capitalisation of CA$38m, GFG Resources’ CA$3.9m in cash burn equates to about 10% of its market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About GFG Resources’ Cash Burn?

On this analysis of GFG Resources’ cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Summing up, we think the GFG Resources’ cash burn is a risk, based on the factors we mentioned in this article. Taking a deeper dive, we’ve spotted 6 warning signs for GFG Resources you should be aware of, and 3 of them make us uncomfortable.

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)

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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.