There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether CAQ Holdings (ASX:CAQ) 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.
When Might CAQ Holdings Run Out Of Money?
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. In June 2020, CAQ Holdings had AU$2.0m in cash, and was debt-free. In the last year, its cash burn was AU$815k. Therefore, from June 2020 it had 2.4 years of cash runway. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Is CAQ Holdings' Cash Burn Changing Over Time?
Whilst it's great to see that CAQ Holdings has already begun generating revenue from operations, last year it only produced AU$1.5m, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 52% over the last year suggests some degree of prudence. In reality, this article only makes a short study of the company's growth data. You can take a look at how CAQ Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For CAQ Holdings To Raise More Cash For Growth?
There's no doubt CAQ Holdings' 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).
CAQ Holdings has a market capitalisation of AU$32m and burnt through AU$815k last year, which is 2.5% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is CAQ Holdings' Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way CAQ Holdings is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. And even its cash burn reduction was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for CAQ Holdings (3 are potentially serious!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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. 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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