There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should C4X Discovery Holdings (LON:C4XD) shareholders be worried about its cash burn? For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does C4X Discovery Holdings Have A Long Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. As at January 2019, C4X Discovery Holdings had cash of UK£9.2m and no debt. Importantly, its cash burn was UK£1.7m over the trailing twelve months. So it had a cash runway of about 5.3 years from January 2019. Even though this is but one measure of the company’s cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.
How Is C4X Discovery Holdings’s Cash Burn Changing Over Time?
Although C4X Discovery Holdings had revenue of UK£7.1m in the last twelve months, its operating revenue was only UK£7.1m in that time period. Given how low that operating leverage is, we think it’s too early to put much weight on the revenue growth, so we’ll focus on how the cash burn is changing, instead. Notably, its cash burn was actually down by 77% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
Can C4X Discovery Holdings Raise More Cash Easily?
There’s no doubt C4X Discovery Holdings’s rapidly reducing cash burn brings comfort, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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 UK£23m, C4X Discovery Holdings’s UK£1.7m in cash burn equates to about 7.6% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year’s growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is C4X Discovery Holdings’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about C4X Discovery Holdings’s cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn relative to its market cap was very encouraging. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. Notably, our data indicates that C4X Discovery Holdings insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.Of course C4X Discovery Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Simply Wall St has no position in the stocks mentioned. Thank you for reading.