We Think ARHT Media (CVE:ART) Needs To Drive Business Growth Carefully

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

Given this risk, we thought we'd take a look at whether ARHT Media (CVE:ART) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for ARHT Media

Does ARHT Media Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. ARHT Media has such a small amount of debt that we'll set it aside, and focus on the CA$2.9m in cash it held at September 2021. In the last year, its cash burn was CA$4.9m. That means it had a cash runway of around 7 months as of September 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is ARHT Media Growing?

ARHT Media actually ramped up its cash burn by a whopping 94% in the last year, which shows it is boosting investment in the business. On the bright side, at least operating revenue was up 34% over the same period, giving some cause for hope. On balance, we'd say the company is improving over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how ARHT Media is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can ARHT Media Raise Cash?

Given the trajectory of ARHT Media's cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).

ARHT Media's cash burn of CA$4.9m is about 14% of its CA$36m market capitalisation. 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 ARHT Media's Cash Burn A Worry?

On this analysis of ARHT Media's cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. Summing up, we think the ARHT Media's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for ARHT Media (2 are a bit unpleasant!) that you should be aware of before investing here.

Of course ARHT Media 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.