Stock Analysis

We Think Banxa Holdings (CVE:BNXA) Can Easily Afford To Drive Business Growth

TSXV:BNXA
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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, 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Banxa Holdings (CVE:BNXA) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Banxa Holdings

When Might Banxa Holdings Run Out Of Money?

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. Banxa Holdings has such a small amount of debt that we'll set it aside, and focus on the AU$11m in cash it held at March 2022. In the last year, its cash burn was AU$7.5m. That means it had a cash runway of around 17 months as of March 2022. Notably, however, analysts think that Banxa Holdings will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
TSXV:BNXA Debt to Equity History June 27th 2022

How Well Is Banxa Holdings Growing?

Notably, Banxa Holdings actually ramped up its cash burn very hard and fast in the last year, by 160%, signifying heavy investment in the business. It seems likely that the vociferous operating revenue growth of 142% during that time may well have given management confidence to ramp investment. Considering both these factors, we're not particularly excited by its growth profile. 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.

Can Banxa Holdings Raise More Cash Easily?

Even though it seems like Banxa Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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. 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.

Since it has a market capitalisation of AU$52m, Banxa Holdings' AU$7.5m in cash burn equates to about 15% of its market value. 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.

So, Should We Worry About Banxa Holdings' Cash Burn?

As you can probably tell by now, we're not too worried about Banxa Holdings' cash burn. For example, we think its revenue growth suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Banxa Holdings has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course Banxa Holdings 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.