Stock Analysis

We Think Konsolidator (CPH:KONSOL) Needs To Drive Business Growth Carefully

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CPSE:KONSOL
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Just because a business does not make any money, does not mean that the stock will go down. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So, the natural question for Konsolidator (CPH:KONSOL) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Konsolidator

How Long Is Konsolidator's Cash Runway?

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. As at December 2020, Konsolidator had cash of kr.19m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was kr.17m over the trailing twelve months. So it had a cash runway of approximately 13 months from December 2020. 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.

debt-equity-history-analysis
CPSE:KONSOL Debt to Equity History May 5th 2021

How Is Konsolidator's Cash Burn Changing Over Time?

In our view, Konsolidator doesn't yet produce significant amounts of operating revenue, since it reported just kr.7.5m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. During the last twelve months, its cash burn actually ramped up 98%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Konsolidator is building its business over time.

Can Konsolidator Raise More Cash Easily?

While Konsolidator does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Since it has a market capitalisation of kr.479m, Konsolidator's kr.17m in cash burn equates to about 3.6% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Konsolidator's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Konsolidator's cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Konsolidator has 4 warning signs (and 1 which is a bit concerning) we think you should know about.

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