AgriFORCE Growing Systems (NASDAQ:AGRI) Is In A Strong Position To Grow Its Business

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. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should AgriFORCE Growing Systems (NASDAQ:AGRI) shareholders be worried about its 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for AgriFORCE Growing Systems

How Long Is AgriFORCE Growing Systems' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at September 2021, AgriFORCE Growing Systems had cash of US$10m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was US$4.2m over the trailing twelve months. That means it had a cash runway of about 2.4 years as of September 2021. Importantly, though, the one analyst we see covering the stock thinks that AgriFORCE Growing Systems will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

How Is AgriFORCE Growing Systems' Cash Burn Changing Over Time?

AgriFORCE Growing Systems didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. So while we can't look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. Over the last year its cash burn actually increased by 27%, which suggests that management are increasing investment in future growth, but not too quickly. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Hard Would It Be For AgriFORCE Growing Systems To Raise More Cash For Growth?

Given its cash burn trajectory, AgriFORCE Growing Systems shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Since it has a market capitalisation of US$27m, AgriFORCE Growing Systems' US$4.2m in cash burn equates to about 16% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is AgriFORCE Growing Systems' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way AgriFORCE Growing Systems is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although its increasing cash burn does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for AgriFORCE Growing Systems (1 shouldn't be ignored!) that you should be aware of before investing here.

Of course AgriFORCE Growing Systems 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. 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.