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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether CBD Global Sciences (CSE:CBDN) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does CBD Global Sciences Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at July 2019, CBD Global Sciences had cash of CA$63k and no debt. In the last year, its cash burn was CA$154k. So it had a cash runway of approximately 5 months from July 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. Depicted below, you can see how its cash holdings have changed over time.
How Easily Can CBD Global Sciences Raise Cash?
Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
CBD Global Sciences's cash burn of CA$154k is about 2.9% of its CA$5.3m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
Is CBD Global Sciences's Cash Burn A Worry?
Given it's an early stage company, we don't have a lot of data with which to judge CBD Global Sciences's cash burn. Having said that, we can say that its cash burn relative to its market cap was a real positive. For us, the key takeaway here is that its cash burn is worth monitoring closely because it may have to raise more capital in due course. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the CBD Global Sciences CEO is paid..
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.
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