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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for 48North Cannabis (CVE:NRTH) shareholders is whether they should be concerned by its rate of 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 48North Cannabis Have A Long 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 March 2019, 48North Cannabis had cash of CA$18m and no debt. Importantly, its cash burn was CA$6.2m over the trailing twelve months. Therefore, from March 2019 it had 2.9 years of cash runway. Importantly, though, the one analyst we see covering the stock thinks that 48North Cannabis will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. Depicted below, you can see how its cash holdings have changed over time.
How Is 48North Cannabis’s Cash Burn Changing Over Time?
Although 48North Cannabis had revenue of CA$4.3m in the last twelve months, its operating revenue was only CA$4.3m in that time period. Given how low that operating leverage is, we think it’s too early to put much weight on the revenue growth, so we’ll focus on how the cash burn is changing, instead. It seems likely that the business is content with its current spending, as the cash burn rate stayed steady over the last twelve months. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can 48North Cannabis Raise More Cash Easily?
While 48North Cannabis 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
48North Cannabis’s cash burn of CA$6.2m is about 5.3% of its CA$116m market capitalisation. That’s a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is 48North Cannabis’s Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about 48North Cannabis’s cash burn. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its cash burn reduction, but even that wasn’t too bad! Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Notably, our data indicates that 48North Cannabis insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course 48North Cannabis 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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.