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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we’d take a look at whether Cannabix Technologies (CSE:BLO) shareholders should 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
Does Cannabix Technologies Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Cannabix Technologies last reported its balance sheet in April 2020, it had zero debt and cash worth CA$8.4m. Looking at the last year, the company burnt through CA$1.9m. Therefore, from April 2020 it had 4.5 years of cash runway. There’s no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.
How Is Cannabix Technologies’ Cash Burn Changing Over Time?
Cannabix Technologies 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. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Cannabix Technologies makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Cannabix Technologies Raise Cash?
While its cash burn is only increasing slightly, Cannabix Technologies shareholders should still consider the potential need for further cash, down the track. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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.
Cannabix Technologies has a market capitalisation of CA$49m and burnt through CA$1.9m last year, which is 3.9% of the company’s market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
Is Cannabix Technologies’ Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about Cannabix Technologies’ cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we’re not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Cannabix Technologies (of which 1 doesn’t sit too well with us!) you should know about.
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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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