Stock Analysis

We're Keeping An Eye On Green Ocean Corporation Berhad's (KLSE:GOCEAN) Cash Burn Rate

KLSE:GOCEAN
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We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Green Ocean Corporation Berhad (KLSE:GOCEAN) shareholders be worried about its cash burn? 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Green Ocean Corporation Berhad

When Might Green Ocean Corporation Berhad 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. When Green Ocean Corporation Berhad last reported its balance sheet in September 2021, it had zero debt and cash worth RM73m. In the last year, its cash burn was RM42m. That means it had a cash runway of around 21 months as of September 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. Depicted below, you can see how its cash holdings have changed over time.

debt-equity-history-analysis
KLSE:GOCEAN Debt to Equity History January 11th 2022

Is Green Ocean Corporation Berhad's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Green Ocean Corporation Berhad actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 92%, which is rather concerning. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Green Ocean Corporation Berhad is building its business over time.

How Easily Can Green Ocean Corporation Berhad Raise Cash?

Given its problematic fall in revenue, Green Ocean Corporation Berhad shareholders should consider how the company could fund its growth, if it turns out it needs more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Green Ocean Corporation Berhad has a market capitalisation of RM84m and burnt through RM42m last year, which is 50% of the company's market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

Is Green Ocean Corporation Berhad's Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Green Ocean Corporation Berhad's cash runway was relatively promising. Summing up, we think the Green Ocean Corporation Berhad's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Green Ocean Corporation Berhad (2 can't be ignored!) that you should be aware of before investing here.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.