Stock Analysis

We Think Patriot One Technologies (TSE:PAT) Needs To Drive Business Growth Carefully

TSX:XTRA
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Patriot One Technologies (TSE:PAT) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for Patriot One Technologies

When Might Patriot One Technologies Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at July 2021, Patriot One Technologies had cash of CA$9.7m and no debt. Looking at the last year, the company burnt through CA$12m. That means it had a cash runway of around 9 months as of July 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
TSX:PAT Debt to Equity History December 7th 2021

How Is Patriot One Technologies' Cash Burn Changing Over Time?

Whilst it's great to see that Patriot One Technologies has already begun generating revenue from operations, last year it only produced CA$1.1m, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. As it happens, the company's cash burn reduced by 34% over the last year, which suggests that management are mindful of the possibility of running out of cash. Admittedly, we're a bit cautious of Patriot One Technologies due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can Patriot One Technologies Raise Cash?

While Patriot One Technologies is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.

Patriot One Technologies has a market capitalisation of CA$65m and burnt through CA$12m last year, which is 19% of the company's 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.

So, Should We Worry About Patriot One Technologies' Cash Burn?

On this analysis of Patriot One Technologies' cash burn, we think its cash burn reduction was reassuring, while its cash runway has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Patriot One Technologies (3 are a bit concerning!) that you should be aware of before investing here.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.