Should You Buy Wildflower Marijuana Inc (FRA:RSP) For This Reason?

As the €53.09M market cap Wildflower Marijuana Inc (DB:RSP) released another year of negative earnings, investors may be on edge waiting for breakeven. A crucial question to bear in mind when you’re an investor of an unprofitable business, is whether the company will have to raise more capital in the near future. Cash is crucial to run a business, and if a company burns through its reserves fast, it will need to come back to market for additional capital raising. This may not always be on their own terms, which could hurt current shareholders if the new deal lowers the value of their shares. Wildflower Marijuana may need to come to market again, but the question is, when? Below, I’ve analysed the most recent financial data to help answer this question. See our latest analysis for Wildflower Marijuana

What is cash burn?

Wildflower Marijuana’s expenses are currently higher than the money it makes from its day-to-day operations, which means it is funding its overhead with equity capital a.k.a. its cash. With a negative operating cash flow of -CA$1.94M, Wildflower Marijuana is chipping away at its CA$80.92K cash reserves in order to run its business. The measure of how fast Wildflower Marijuana goes through its cash reserves over time is called the cash burn rate. The most significant threat facing investor is the company going out of business when it runs out of money and cannot raise any more capital. Wildflower Marijuana operates in the personal products industry, which on average generates a positive earnings per share, meaning the majority of its peers are profitable. Wildflower Marijuana faces the trade-off between running the risk of depleting its cash reserves too fast, or risk falling behind its profitable competitors by investing too slowly.

DB:RSP Income Statement May 1st 18
DB:RSP Income Statement May 1st 18

When will Wildflower Marijuana need to raise more cash?

Wildflower Marijuana has to pay its employees and other necessities such as rent and admin costs in order to keep its business running. These costs are called operational expenses, which is sometimes shortened to opex. In this calculation I’ve only included recurring sales, general and admin (SG&A) expenses, and R&D expenses occured within they year. Opex (excluding one-offs) grew by 25.00% over the past year, which is considerably high. My cash burn analysis suggests that, if Wildflower Marijuana continues to spend its cash reserves at this current high rate, it’ll have to raise capital within the upcoming months, which may be a surprise to some shareholders. Moreover, even if Wildflower Marijuana kept its opex level at CA$1.41M, it will still have to come to market within the next year. Even though this is analysis is fairly basic, and Wildflower Marijuana still can cut its overhead in the near future, or open a new line of credit instead of issuing new equity shares, the analysis still helps us understand how sustainable the Wildflower Marijuana’s operation is, and when things may have to change.

Next Steps:

This analysis isn’t meant to deter you from Wildflower Marijuana, but rather, to help you better understand the risks involved investing in loss-making companies. The cash burn analysis result indicates a cash constraint for the company, due to its high opex growth and its level of cash reserves. The potential equity raising resulting from this means you could potentially get a better deal on the share price when the company raises capital next. Keep in mind I haven’t considered other factors such as how RSP is expected to perform in the future. I suggest you continue to research Wildflower Marijuana to get a more holistic view of the company by looking at:
  1. Historical Performance: What has RSP’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  2. Management Team: An experienced management team on the helm increases our confidence in the business – take a look at who sits on Wildflower Marijuana’s board and the CEO’s back ground.
  3. Other High-Performing Stocks: If you believe you should cushion your portfolio with something less risky, scroll through our free list of these great stocks here.
NB: Figures in this article are calculated using data from the trailing twelve months from 31 December 2017. This may not be consistent with full year annual report figures. Operating expenses include only SG&A and one-year R&D.