Will ClearVue Technologies (ASX:CPV) Spend Its Cash Wisely?

We can readily understand why investors are attracted to unprofitable companies. Indeed, ClearVue Technologies (ASX:CPV) stock is up 309% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given its strong share price performance, we think it's worthwhile for ClearVue Technologies shareholders to consider whether its cash burn is concerning. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for ClearVue Technologies

Does ClearVue Technologies Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When ClearVue Technologies last reported its balance sheet in December 2020, it had zero debt and cash worth AU$2.4m. Looking at the last year, the company burnt through AU$3.0m. So it had a cash runway of approximately 9 months from December 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.

How Is ClearVue Technologies' Cash Burn Changing Over Time?

In the last year, ClearVue Technologies did book revenue of AU$196k, but its revenue from operations was less, at just AU$12k. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. It's possible that the 11% reduction in cash burn over the last year is evidence of management tightening their belts as cash reserves deplete. ClearVue Technologies makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For ClearVue Technologies To Raise More Cash For Growth?

While ClearVue Technologies 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. 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 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).

ClearVue Technologies has a market capitalisation of AU$70m and burnt through AU$3.0m last year, which is 4.3% 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 ClearVue Technologies' Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought ClearVue Technologies' cash burn relative to its market cap was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 6 warning signs for ClearVue Technologies (of which 3 don't sit too well with us!) you should know about.

Of course ClearVue Technologies 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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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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