Here's Why We're Not Too Worried About LiveHire's (ASX:LVH) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. By way of example, LiveHire (ASX:LVH) has seen its share price rise 147% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So notwithstanding the buoyant share price, we think it's well worth asking whether LiveHire's cash burn is too risky. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for LiveHire

Does LiveHire Have A Long Cash Runway?

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, LiveHire had AU$17m in cash, and was debt-free. Looking at the last year, the company burnt through AU$9.6m. So it had a cash runway of approximately 22 months from December 2020. Notably, one analyst forecasts that LiveHire will break even (at a free cash flow level) in about 2 years. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. The image below shows how its cash balance has been changing over the last few years.

How Well Is LiveHire Growing?

It was fairly positive to see that LiveHire reduced its cash burn by 31% during the last year. On top of that, operating revenue was up 34%, making for a heartening combination It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For LiveHire To Raise More Cash For Growth?

Even though it seems like LiveHire 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. Commonly, a business will sell new shares in itself to raise cash and 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.

LiveHire has a market capitalisation of AU$138m and burnt through AU$9.6m last year, which is 7.0% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is LiveHire's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way LiveHire is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. Its cash burn reduction wasn't quite as good, but was still rather encouraging! Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. An in-depth examination of risks revealed 3 warning signs for LiveHire that readers should think about before committing capital to this stock.

Of course LiveHire may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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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