We Think Covalon Technologies (CVE:COV) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Covalon Technologies (CVE:COV) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Covalon Technologies

How Long Is Covalon Technologies' Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Covalon Technologies last reported its balance sheet in June 2023, it had zero debt and cash worth CA$9.2m. Importantly, its cash burn was CA$5.9m over the trailing twelve months. Therefore, from June 2023 it had roughly 19 months of cash runway. 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Covalon Technologies Growing?

It was fairly positive to see that Covalon Technologies reduced its cash burn by 29% during the last year. On top of that, operating revenue was up 30%, making for a heartening combination We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Covalon Technologies has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Covalon Technologies To Raise More Cash For Growth?

Covalon Technologies seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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. 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.

Covalon Technologies has a market capitalisation of CA$37m and burnt through CA$5.9m last year, which is 16% of the company's 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 Covalon Technologies' Cash Burn A Worry?

Covalon Technologies appears to be in pretty good health when it comes to its cash burn situation. Not only was its cash burn reduction quite good, but its revenue growth was a real positive. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Covalon Technologies' situation. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Covalon Technologies (of which 1 can't be ignored!) you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.