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, 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 GWR Group (ASX:GWR) shareholders be worried about its cash burn? In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does GWR Group Have A Long Cash Runway?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at June 2019, GWR Group had cash of AU$2.9m and no debt. Importantly, its cash burn was AU$3.1m over the trailing twelve months. So it had a cash runway of approximately 11 months from June 2019. 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. You can see how its cash balance has changed over time in the image below.
How Is GWR Group’s Cash Burn Changing Over Time?
Although GWR Group reported revenue of AU$232k 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 6.2% 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. GWR Group makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For GWR Group To Raise More Cash For Growth?
Since its cash burn is increasing (albeit only slightly), GWR Group shareholders should still be mindful of the possibility it will require more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
GWR Group has a market capitalisation of AU$25m and burnt through AU$3.1m last year, which is 12% of the company’s market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
How Risky Is GWR Group’s Cash Burn Situation?
On this analysis of GWR Group’s cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. 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. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the GWR Group CEO receives in total remuneration.
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)
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If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.