Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Planet Green Holdings (NYSEMKT:PLAG) 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Planet Green Holdings Run Out Of Money?
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 September 2019, Planet Green Holdings had cash of US$2.7m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$14m over the trailing twelve months. Therefore, from September 2019 it had roughly 2 months of cash runway. It’s extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
How Well Is Planet Green Holdings Growing?
Planet Green Holdings boosted investment sharply in the last year, with cash burn ramping by 79%. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 98% growth in revenue, over the very same year. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company’s growth data. This graph of historic revenue growth shows how Planet Green Holdings is building its business over time.
How Easily Can Planet Green Holdings Raise Cash?
Given the trajectory of Planet Green Holdings’s cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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.
Planet Green Holdings’s cash burn of US$14m is about 61% of its US$23m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we’d consider it to be a high risk stock, with the real possibility of extreme dilution.
Is Planet Green Holdings’s Cash Burn A Worry?
On this analysis of Planet Green Holdings’s cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. Once we consider the metrics mentioned in this article together, we’re left with very little confidence in the company’s ability to manage its cash burn, and we think it will probably need more money. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Planet Green Holdings CEO is paid..
Of course Planet Green Holdings 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.
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