Will co.don (ETR:CNWK) Spend Its Cash Wisely?

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for co.don (ETR:CNWK) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for co.don

How Long Is co.don's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When co.don last reported its balance sheet in June 2020, it had zero debt and cash worth €6.4m. Importantly, its cash burn was €12m over the trailing twelve months. That means it had a cash runway of around 6 months as of June 2020. Importantly, analysts think that co.don will reach cashflow breakeven in 2 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. You can see how its cash balance has changed over time in the image below.

How Well Is co.don Growing?

We reckon the fact that co.don managed to shrink its cash burn by 25% over the last year is rather encouraging. And operating revenue was up by 13% too. On balance, we'd say the company is improving over time. 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 co.don Raise More Cash Easily?

Since co.don revenue has been falling, 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. 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 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).

Since it has a market capitalisation of €51m, co.don's €12m in cash burn equates to about 24% of its market value. 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 co.don's Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought co.don's cash burn reduction was relatively promising. One real positive is that analysts are forecasting that the company will reach breakeven. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 4 warning signs for co.don that potential shareholders should take into account before putting money into a stock.

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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This article by Simply Wall St is general in nature. 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.
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