We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Agrimin (ASX:AMN) shareholders 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. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Agrimin 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 Agrimin last reported its balance sheet in June 2019, it had zero debt and cash worth AU$5.7m. In the last year, its cash burn was AU$12m. So it had a cash runway of approximately 6 months from June 2019. That’s a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. You can see how its cash balance has changed over time in the image below.
How Is Agrimin’s Cash Burn Changing Over Time?
Although Agrimin reported revenue of AU$5.5k last year, it didn’t actually have any revenue from operations. That means we consider it a pre-revenue business, and we will focus our growth analysis on cash burn, for now. With the cash burn rate up 41% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company’s true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Agrimin Raise More Cash Easily?
Given its cash burn trajectory, Agrimin shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Agrimin’s cash burn of AU$12m is about 13% of its AU$91m market capitalisation. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
So, Should We Worry About Agrimin’s Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Agrimin’s cash burn relative to its market cap was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Agrimin CEO is paid..
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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