We Think Digihost Technology (CVE:DGHI) Needs To Drive Business Growth Carefully

By
Simply Wall St
Published
September 07, 2021
TSXV:DGHI
Source: Shutterstock

Just because a business does not make any money, does not mean that the stock will go down. By way of example, Digihost Technology (CVE:DGHI) has seen its share price rise 1,224% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Digihost Technology shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Digihost Technology

When Might Digihost Technology 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. Digihost Technology has such a small amount of debt that we'll set it aside, and focus on the US$20m in cash it held at June 2021. Looking at the last year, the company burnt through US$28m. That means it had a cash runway of around 9 months as of June 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
TSXV:DGHI Debt to Equity History September 8th 2021

How Well Is Digihost Technology Growing?

It was quite stunning to see that Digihost Technology increased its cash burn by 1,105% over the last year. But shareholders are no doubt taking some confidence from the rockstar revenue growth of 497% during that same year. In light of the data above, we're fairly sanguine about the business growth trajectory. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Digihost Technology Raise Cash?

Since Digihost Technology has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive 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.

Digihost Technology has a market capitalisation of US$126m and burnt through US$28m last year, which is 23% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is Digihost Technology's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Digihost Technology's revenue growth was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Taking a deeper dive, we've spotted 3 warning signs for Digihost Technology you should be aware of, and 1 of them shouldn't be ignored.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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