There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Liberty Leaf Holdings (CSE:LIB) shareholders should 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's cash, relative to its cash burn.
Does Liberty Leaf Holdings Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2019, Liberty Leaf Holdings had CA$1.1m in cash, and was debt-free. Importantly, its cash burn was CA$1.4m over the trailing twelve months. That means it had a cash runway of around 10 months as of September 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Is Liberty Leaf Holdings's Cash Burn Changing Over Time?
Liberty Leaf Holdings didn't record any revenue over the last year, indicating that it's an early stage company still developing its 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 5.0% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. Liberty Leaf Holdings 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 Liberty Leaf Holdings Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Liberty Leaf Holdings to raise more cash in the future. 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).
Since it has a market capitalisation of CA$4.5m, Liberty Leaf Holdings's CA$1.4m in cash burn equates to about 30% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
So, Should We Worry About Liberty Leaf Holdings's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Liberty Leaf Holdings's cash burn reduction was relatively promising. Summing up, we think the Liberty Leaf Holdings's cash burn is a risk, based on the factors we mentioned in this article. Notably, our data indicates that Liberty Leaf Holdings insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
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 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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