Stock Analysis

We're A Little Worried About Seafarms Group's (ASX:SFG) Cash Burn Rate

ASX:SFG
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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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given this risk, we thought we'd take a look at whether Seafarms Group (ASX:SFG) shareholders should 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Seafarms Group

Does Seafarms Group Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Seafarms Group last reported its balance sheet in June 2022, it had zero debt and cash worth AU$36m. In the last year, its cash burn was AU$61m. Therefore, from June 2022 it had roughly 7 months of cash runway. 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.

debt-equity-history-analysis
ASX:SFG Debt to Equity History February 3rd 2023

How Well Is Seafarms Group Growing?

One thing for shareholders to keep front in mind is that Seafarms Group increased its cash burn by 300% in the last twelve months. While that's concerning on it's own, the fact that operating revenue was actually down 6.5% over the same period makes us positively tremulous. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Seafarms Group is building its business over time.

How Easily Can Seafarms Group Raise Cash?

Since Seafarms Group's revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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$61m is about 125% of its AU$49m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

So, Should We Worry About Seafarms Group's Cash Burn?

There are no prizes for guessing that we think Seafarms Group's cash burn is a bit of a worry. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. 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. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Seafarms Group (3 can't be ignored!) that you should be aware of before investing here.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)

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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.