We Think Q4 (TSE:QFOR) Needs To Drive Business Growth Carefully

Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Q4 (TSE:QFOR) shareholders be worried about its cash burn? In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Q4

Does Q4 Have A Long Cash Runway?

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 September 2022, Q4 had US$38m in cash, and was debt-free. Importantly, its cash burn was US$30m over the trailing twelve months. Therefore, from September 2022 it had roughly 15 months of cash runway. Importantly, analysts think that Q4 will reach cashflow breakeven in 2 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is Q4 Growing?

It was quite stunning to see that Q4 increased its cash burn by 247% over the last year. That does give us pause, and we can't take much solace in the operating revenue growth of 5.5% in the same time frame. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Q4 To Raise More Cash For Growth?

Given the trajectory of Q4's cash burn, many investors will already be thinking about how it might 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. 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.

Since it has a market capitalisation of US$64m, Q4's US$30m in cash burn equates to about 47% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

So, Should We Worry About Q4's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Q4's cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Summing up, we think the Q4's cash burn is a risk, based on the factors we mentioned in this article. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Q4 that potential shareholders should take into account before putting money into a stock.

Of course Q4 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.

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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.