There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, Tabuk Agricultural Development (TADAWUL:6040) has seen its share price rise 183% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So notwithstanding the buoyant share price, we think it's well worth asking whether Tabuk Agricultural Development's cash burn is too risky. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Tabuk Agricultural Development's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2020, Tabuk Agricultural Development had cash of ر.س4.2m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was ر.س6.7m. That means it had a cash runway of around 7 months as of December 2020. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Well Is Tabuk Agricultural Development Growing?
It was fairly positive to see that Tabuk Agricultural Development reduced its cash burn by 36% during the last year. Having said that, the revenue growth of 88% was considerably more inspiring. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Tabuk Agricultural Development is growing revenue over time by checking this visualization of past revenue growth.
How Easily Can Tabuk Agricultural Development Raise Cash?
While Tabuk Agricultural Development seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Companies can raise capital through either debt or equity. 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.
Tabuk Agricultural Development's cash burn of ر.س6.7m is about 0.8% of its ر.س886m market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
How Risky Is Tabuk Agricultural Development's Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Tabuk Agricultural Development's revenue growth was relatively promising. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. An in-depth examination of risks revealed 2 warning signs for Tabuk Agricultural Development that readers should think about before committing capital to this 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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