Here's Why We're Not At All Concerned With Aspen Group's (NASDAQ:ASPU) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for Aspen Group (NASDAQ:ASPU) shareholders is whether they should be concerned by its rate of cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Aspen Group

Does Aspen Group Have A Long 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. When Aspen Group last reported its balance sheet in October 2020, it had zero debt and cash worth US$12m. Importantly, its cash burn was US$10m over the trailing twelve months. Therefore, from October 2020 it had roughly 15 months of cash runway. Importantly, though, analysts think that Aspen Group will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Aspen Group Growing?

Some investors might find it troubling that Aspen Group is actually increasing its cash burn, which is up 9.6% in the last year. The silver lining is that revenue was up 43%, showing the business is growing at the top line. It seems to be growing nicely. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Aspen Group Raise More Cash Easily?

While Aspen Group 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. Many companies end up issuing new shares to fund future 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.

Aspen Group's cash burn of US$10m is about 4.1% of its US$243m market capitalisation. 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 Aspen Group's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Aspen Group's cash burn. For example, we think its revenue growth suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking an in-depth view of risks, we've identified 2 warning signs for Aspen Group that you should be aware of before investing.

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