Stock Analysis

Kaizen Discovery (CVE:KZD) Will Have To Spend Its Cash Wisely

TSXV:KZD
Source: Shutterstock

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So, the natural question for Kaizen Discovery (CVE:KZD) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Kaizen Discovery

Advertisement

How Long Is Kaizen Discovery's Cash Runway?

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 Kaizen Discovery last reported its balance sheet in September 2019, it had zero debt and cash worth CA$459k. In the last year, its cash burn was CA$2.6m. That means it had a cash runway of around 2 months as of September 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.

TSXV:KZD Historical Debt, December 2nd 2019
TSXV:KZD Historical Debt, December 2nd 2019

How Is Kaizen Discovery's Cash Burn Changing Over Time?

Because Kaizen Discovery isn't currently generating revenue, we consider it an early-stage business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. As it happens, the company's cash burn reduced by 11% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Kaizen Discovery makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

Can Kaizen Discovery Raise More Cash Easily?

Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Kaizen Discovery to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Kaizen Discovery has a market capitalisation of CA$9.5m and burnt through CA$2.6m last year, which is 28% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

How Risky Is Kaizen Discovery's Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Kaizen Discovery's cash burn. In particular, we think its cash runway suggests it isn't in a good position to keep funding growth. While not as bad as its cash runway, its cash burn reduction is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Kaizen Discovery CEO receives in total remuneration.

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)

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.