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 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 Drone Delivery Canada (CVE:FLT) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Drone Delivery Canada 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. When Drone Delivery Canada last reported its balance sheet in December 2021, it had zero debt and cash worth CA$28m. In the last year, its cash burn was CA$13m. So it had a cash runway of about 2.2 years from December 2021. Notably, one analyst forecasts that Drone Delivery Canada will break even (at a free cash flow level) in about 2 years. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. Depicted below, you can see how its cash holdings have changed over time.
How Is Drone Delivery Canada's Cash Burn Changing Over Time?
In our view, Drone Delivery Canada doesn't yet produce significant amounts of operating revenue, since it reported just CA$335k in the last twelve months. 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. Over the last year its cash burn actually increased by 40%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. 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 Drone Delivery Canada To Raise More Cash For Growth?
Given its cash burn trajectory, Drone Delivery Canada shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. 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.
Since it has a market capitalisation of CA$112m, Drone Delivery Canada's CA$13m in cash burn equates to about 11% 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.
Is Drone Delivery Canada's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way Drone Delivery Canada is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. One real positive is that at least one analyst is forecasting that the company will reach breakeven. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Taking a deeper dive, we've spotted 4 warning signs for Drone Delivery Canada you should be aware of, and 2 of them are concerning.
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.