Here's Why We're Watching 48North Cannabis's (CVE:NRTH) Cash Burn Situation

By
Simply Wall St
Published
June 03, 2020
TSXV:NRTH

Just because a business does not make any money, does not mean that the stock will go down. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should 48North Cannabis (CVE:NRTH) shareholders 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for 48North Cannabis

When Might 48North Cannabis 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. In March 2020, 48North Cannabis had CA$18m in cash, and was debt-free. Looking at the last year, the company burnt through CA$38m. So it had a cash runway of approximately 6 months from March 2020. Notably, one analyst forecasts that 48North Cannabis will break even (at a free cash flow level) in about 14 months. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

TSXV:NRTH Historical Debt June 3rd 2020
TSXV:NRTH Historical Debt June 3rd 2020

How Well Is 48North Cannabis Growing?

It was quite stunning to see that 48North Cannabis increased its cash burn by 508% over the last year. On the bright side, at least operating revenue was up 34% over the same period, giving some cause for hope. Considering both these metrics, we're a little concerned about how the company is developing. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can 48North Cannabis Raise More Cash Easily?

Since 48North Cannabis has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.

In the last year, 48North Cannabis burned through CA$38m, which is just about equal to its CA$39m market cap. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is 48North Cannabis's Cash Burn A Worry?

On this analysis of 48North Cannabis's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. An in-depth examination of risks revealed 5 warning signs for 48North Cannabis that readers should think about before committing capital to this stock.

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.

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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. 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. Thank you for reading.

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