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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Ark Royal (WSE:ARK) 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). We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
See our latest analysis for Ark Royal
How Long Is Ark Royal’s Cash Runway?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at September 2019, Ark Royal had cash of zł18k and no debt. Importantly, its cash burn was zł6.9k over the trailing twelve months. So it had a cash runway of about 2.6 years from September 2019. Arguably, that’s a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Is Ark Royal’s Cash Burn Changing Over Time?
Whilst it’s great to see that Ark Royal has already begun generating revenue from operations, last year it only produced zł105k, so we don’t think it is generating significant revenue, at this point. As a result, we think it’s a bit early to focus on the revenue growth, so we’ll limit ourselves to looking at how the cash burn is changing over time. The good news, from a balance sheet perspective, is that it actually reduced its cash burn by 95% in the last twelve months. That might not be promising when it comes to business development, but it’s good for the companies cash preservation. Admittedly, we’re a bit cautious of Ark Royal due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Ark Royal Raise More Cash Easily?
While we’re comforted by the recent reduction evident from our analysis of Ark Royal’s cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to 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).
Since it has a market capitalisation of zł2.1m, Ark Royal’s zł6.9k in cash burn equates to about 0.3% of its market value. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
How Risky Is Ark Royal’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about Ark Royal’s cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. And even its cash runway was very encouraging. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Ark Royal’s CEO gets paid each year.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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.