Stock Analysis

Seafarms Group (ASX:SFG) Will Have To Spend Its Cash Wisely

ASX:SFG
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should Seafarms Group (ASX:SFG) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Seafarms Group

How Long Is Seafarms Group's 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. When Seafarms Group last reported its balance sheet in June 2022, it had zero debt and cash worth AU$36m. Looking at the last year, the company burnt through AU$63m. Therefore, from June 2022 it had roughly 7 months of cash runway. 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.

debt-equity-history-analysis
ASX:SFG Debt to Equity History September 9th 2022

How Well Is Seafarms Group Growing?

It was quite stunning to see that Seafarms Group increased its cash burn by 276% over the last year. As if that's not bad enough, the operating revenue also dropped by 4.4%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Seafarms Group has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Seafarms Group To Raise More Cash For Growth?

Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Seafarms Group could raise cash. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

Seafarms Group's cash burn of AU$63m is about the same as its market capitalisation of AU$63m. Given just how high that expenditure is, relative to the company's market value, we think there's an elevated risk of funding distress, and we would be very nervous about holding the stock.

Is Seafarms Group's Cash Burn A Worry?

As you can probably tell by now, we're rather concerned about Seafarms Group's cash burn. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. And although we accept its falling revenue wasn't as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Taking a deeper dive, we've spotted 4 warning signs for Seafarms Group you should be aware of, and 2 of them shouldn't be ignored.

Of course Seafarms Group 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.