We can readily understand why investors are attracted to unprofitable companies. 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 Appia Energy (CNSX:API) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. Let’s start with an examination of the business’s cash, relative to its cash burn.
How Long Is Appia Energy’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. When Appia Energy last reported its balance sheet in June 2019, it had zero debt and cash worth CA$1.4m. Looking at the last year, the company burnt through CA$1.8m. That means it had a cash runway of around 9 months as of June 2019. 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 Appia Energy’s Cash Burn Changing Over Time?
Appia Energy 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. The skyrocketing cash burn up 106% year on year certainly tests our nerves. It’s fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Admittedly, we’re a bit cautious of Appia Energy 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 Appia Energy Raise Cash?
Given its cash burn trajectory, Appia Energy shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Appia Energy has a market capitalisation of CA$15m and burnt through CA$1.8m last year, which is 12% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Appia Energy’s Cash Burn A Worry?
On this analysis of Appia Energy’s cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Appia Energy’s cash burn is a risk, based on the factors we mentioned in this article. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Appia Energy insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
Of course Appia Energy 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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