We're A Little Worried About LAIX's (NYSE:LAIX) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for LAIX (NYSE:LAIX) shareholders is whether they should be concerned by its rate of 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). Let's start with an examination of the business' cash, relative to its cash burn.

View our latest analysis for LAIX

When Might LAIX Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2021, LAIX had cash of CN¥171m and no debt. Importantly, its cash burn was CN¥312m over the trailing twelve months. That means it had a cash runway of around 7 months as of March 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.

How Well Is LAIX Growing?

Some investors might find it troubling that LAIX is actually increasing its cash burn, which is up 37% in the last year. Also concerning, operating revenue was actually down by 5.6% in that time. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how LAIX has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For LAIX To Raise More Cash For Growth?

LAIX revenue is declining and its cash burn is increasing, so many may be considering its need to raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

LAIX's cash burn of CN¥312m is about 93% of its CN¥336m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.

Is LAIX's Cash Burn A Worry?

As you can probably tell by now, we're rather concerned about LAIX's cash burn. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash burn relative to its market cap, its falling revenue is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. On another note, LAIX has 5 warning signs (and 3 which make us uncomfortable) we think you should know about.

Of course LAIX 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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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. 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.
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