Companies Like Acceleware (CVE:AXE) Can Afford To Invest In Growth

By
Simply Wall St
Published
November 04, 2021
TSXV:AXE
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. For example, Acceleware (CVE:AXE) shareholders have done very well over the last year, with the share price soaring by 169%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky Acceleware's cash burn is. 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.

View our latest analysis for Acceleware

When Might Acceleware Run Out Of Money?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2021, Acceleware had cash of CA$3.7m and no debt. In the last year, its cash burn was CA$206k. So it had a very long cash runway of many years from June 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
TSXV:AXE Debt to Equity History November 5th 2021

How Is Acceleware's Cash Burn Changing Over Time?

In our view, Acceleware doesn't yet produce significant amounts of operating revenue, since it reported just CA$573k in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The 82% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. Admittedly, we're a bit cautious of Acceleware due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

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

While we're comforted by the recent reduction evident from our analysis of Acceleware's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. 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).

Acceleware's cash burn of CA$206k is about 0.5% of its CA$38m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

How Risky Is Acceleware's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Acceleware's cash burn. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. Taking a deeper dive, we've spotted 4 warning signs for Acceleware you should be aware of, and 2 of them are a bit unpleasant.

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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