Here's Why We're Watching Elixinol Wellness' (ASX:EXL) Cash Burn Situation

By
Simply Wall St
Published
September 27, 2021
ASX:EXL
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Elixinol Wellness (ASX:EXL) 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'.

See our latest analysis for Elixinol Wellness

When Might Elixinol Wellness Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, Elixinol Wellness had cash of AU$19m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$16m. That means it had a cash runway of around 14 months as of June 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:EXL Debt to Equity History September 27th 2021

How Well Is Elixinol Wellness Growing?

Elixinol Wellness managed to reduce its cash burn by 62% over the last twelve months, which suggests it's on the right flight path. Unfortunately, however, operating revenue dropped 44% during the same time frame. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Elixinol Wellness has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Elixinol Wellness Raise Cash?

Even though it seems like Elixinol Wellness is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and 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.

Elixinol Wellness has a market capitalisation of AU$35m and burnt through AU$16m last year, which is 46% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

How Risky Is Elixinol Wellness' Cash Burn Situation?

On this analysis of Elixinol Wellness' cash burn, we think its cash burn reduction was reassuring, while its falling revenue has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Elixinol Wellness (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 companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

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Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.