Here's Why We're Not Too Worried About Altisource Asset Management's (NYSEMKT:AAMC) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. By way of example, Altisource Asset Management (NYSEMKT:AAMC) has seen its share price rise 137% over the last year, delighting many shareholders. 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 notwithstanding the buoyant share price, we think it's well worth asking whether Altisource Asset Management'scash 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'.

See our latest analysis for Altisource Asset Management

When Might Altisource Asset Management Run Out Of Money?

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. In June 2020, Altisource Asset Management had US$30m in cash, and was debt-free. In the last year, its cash burn was US$5.7m. That means it had a cash runway of about 5.3 years as of June 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. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Altisource Asset Management Growing?

Some investors might find it troubling that Altisource Asset Management is actually increasing its cash burn, which is up 43% in the last year. To be fair, given that fact it's hardly inspiring to see that the operating revenue was flat year on year. Taken together, we think these growth metrics are a little worrying. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Altisource Asset Management has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Altisource Asset Management Raise Cash?

While Altisource Asset Management 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of US$39m, Altisource Asset Management's US$5.7m in cash burn equates to about 15% of its market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

Is Altisource Asset Management's Cash Burn A Worry?

On this analysis of Altisource Asset Management's cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Altisource Asset Management's situation. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for Altisource Asset Management (1 is a bit unpleasant!) that you should be aware of before investing here.

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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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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