Just because a business does not make any money, does not mean that the stock will go down. By way of example, DMG Blockchain Solutions (CVE:DMGI) has seen its share price rise 605% over the last year, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So notwithstanding the buoyant share price, we think it's well worth asking whether DMG Blockchain Solutions' cash burn is too risky. 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.
When Might DMG Blockchain Solutions Run Out Of Money?
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. DMG Blockchain Solutions has such a small amount of debt that we'll set it aside, and focus on the CA$42m in cash it held at March 2021. Looking at the last year, the company burnt through CA$32m. That means it had a cash runway of around 16 months as of March 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
Is DMG Blockchain Solutions' Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because DMG Blockchain Solutions actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Unfortunately, the last year has been a disappointment, with operating revenue dropping 21% during the period. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how DMG Blockchain Solutions is building its business over time.
How Easily Can DMG Blockchain Solutions Raise Cash?
Since its revenue growth is moving in the wrong direction, DMG Blockchain Solutions shareholders may wish to think ahead to when the company may need to raise more cash. 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 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.
DMG Blockchain Solutions' cash burn of CA$32m is about 26% of its CA$123m market capitalisation. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is DMG Blockchain Solutions' Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought DMG Blockchain Solutions' cash runway was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Taking a deeper dive, we've spotted 4 warning signs for DMG Blockchain Solutions you should be aware of, and 1 of them is significant.
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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