Here's Why We're Watching Carbeeza's (CVE:AUTO) Cash Burn Situation

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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Carbeeza (CVE:AUTO) shareholders 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Carbeeza

How Long Is Carbeeza's 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 Carbeeza last reported its balance sheet in March 2021, it had zero debt and cash worth CA$796k. Importantly, its cash burn was CA$1.3m over the trailing twelve months. That means it had a cash runway of around 7 months as of March 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. However, if we extrapolate the company's recent cash burn trend, then it would have a longer cash run way. You can see how its cash balance has changed over time in the image below.

How Easily Can Carbeeza Raise Cash?

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 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).

Carbeeza has a market capitalisation of CA$38m and burnt through CA$1.3m last year, which is 3.4% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Carbeeza's Cash Burn A Worry?

Given it's an early stage company, we don't have a lot of data with which to judge Carbeeza's cash burn. Certainly, we'd be more confident in the stock if it was generating operating revenue. However, it is fair to say that its cash burn relative to its market cap gave us comfort. Even though we don't think shareholders should be alarmed by its cash burn, we do think they should be keeping a close eye on it. Separately, we looked at different risks affecting the company and spotted 5 warning signs for Carbeeza (of which 1 is concerning!) you should know about.

Of course Carbeeza may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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.

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