Just because a business does not make any money, does not mean that the stock will go down. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Blockchain Lab (WSE:BTC) 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.
How Long Is Blockchain Lab’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. In September 2019, Blockchain Lab had zł75k in cash, and was debt-free. In the last year, its cash burn was zł119k. That means it had a cash runway of around 8 months as of September 2019. That’s quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Easily Can Blockchain Lab Raise 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 to drive 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.
Since it has a market capitalisation of zł4.9m, Blockchain Lab’s zł119k in cash burn equates to about 2.4% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
How Risky Is Blockchain Lab’s Cash Burn Situation?
Because Blockchain Lab is an early stage company, we don’t have a great deal of data on which to form an opinion of its cash burn. Having said that, we can say that its cash burn relative to its market cap was a real positive. Even though we don’t think shareholders should be alarmed by its cash burn, we do think they should be keeping a close eye on it. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Blockchain Lab CEO receives in total remuneration.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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