Stock Analysis

We're Not Very Worried About Green Scientific Labs Holdings' (CSE:GSL) Cash Burn Rate

CNSX:GSL
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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Green Scientific Labs Holdings (CSE:GSL) shareholders be worried about its cash burn? 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.

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When Might Green Scientific Labs 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. As at September 2021, Green Scientific Labs Holdings had cash of US$4.0m and no debt. Looking at the last year, the company burnt through US$2.9m. So it had a cash runway of approximately 17 months from September 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
CNSX:GSL Debt to Equity History February 23rd 2022

Is Green Scientific Labs Holdings' Revenue Growing?

Given that Green Scientific Labs Holdings actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. We think that it's fairly positive to see that revenue grew 32% in the last twelve months. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Green Scientific Labs Holdings is building its business over time.

How Hard Would It Be For Green Scientific Labs Holdings To Raise More Cash For Growth?

While Green Scientific Labs Holdings is showing solid revenue growth, 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. 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).

Green Scientific Labs Holdings has a market capitalisation of US$32m and burnt through US$2.9m last year, which is 8.8% 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.

So, Should We Worry About Green Scientific Labs Holdings' Cash Burn?

The good news is that in our view Green Scientific Labs Holdings' cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong revenue growth. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Green Scientific Labs Holdings that investors should know when investing in the stock.

Of course Green Scientific Labs Holdings 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. 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.