We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Cann Group (ASX:CAN) shareholders should 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'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Cann Group Run Out Of Money?
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. In December 2020, Cann Group had AU$28m in cash, and was debt-free. Importantly, its cash burn was AU$26m over the trailing twelve months. So it had a cash runway of approximately 13 months from December 2020. Importantly, the one analyst we see covering the stock thinks that Cann Group will reach cashflow breakeven in 3 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Is Cann Group's Cash Burn Changing Over Time?
Although Cann Group had revenue of AU$6.0m in the last twelve months, its operating revenue was only AU$1.2m in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. The 59% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can Cann Group Raise Cash?
There's no doubt Cann Group's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. 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).
Since it has a market capitalisation of AU$189m, Cann Group's AU$26m in cash burn equates to about 14% of its market value. 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.
How Risky Is Cann Group's Cash Burn Situation?
Cann Group appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash burn relative to its market cap quite good, but its cash burn reduction was a real positive. One real positive is that at least one analyst is forecasting that the company will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Cann Group's situation. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Cann Group (of which 2 are concerning!) you should know about.
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