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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should A.H. Belo (NYSE:AHC) 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is A.H. Belo's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When A.H. Belo last reported its balance sheet in September 2020, it had zero debt and cash worth US$43m. In the last year, its cash burn was US$4.7m. That means it had a cash runway of about 9.2 years as of September 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
Is A.H. Belo's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because A.H. Belo actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 15%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how A.H. Belo is building its business over time.
How Easily Can A.H. Belo Raise Cash?
Given its problematic fall in revenue, A.H. Belo shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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.
Since it has a market capitalisation of US$29m, A.H. Belo's US$4.7m 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.
So, Should We Worry About A.H. Belo's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way A.H. Belo is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its falling revenue wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. On another note, A.H. Belo has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.
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