There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Agora (NASDAQ:API) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Agora
SWOT Analysis for Agora
- Currently debt free.
- Expensive based on P/S ratio and estimated fair value.
- Forecast to reduce losses next year.
- Has less than 3 years of cash runway based on current free cash flow.
- Not expected to become profitable over the next 3 years.
How Long Is Agora's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Agora last reported its balance sheet in December 2022, it had zero debt and cash worth US$428m. Importantly, its cash burn was US$220m over the trailing twelve months. Therefore, from December 2022 it had roughly 23 months of cash runway. Notably, analysts forecast that Agora will break even (at a free cash flow level) in about 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Agora Growing?
It was quite stunning to see that Agora increased its cash burn by 578% over the last year. As if that's not bad enough, the operating revenue also dropped by 4.4%, making us very wary indeed. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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.
How Easily Can Agora Raise Cash?
Since Agora can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Agora has a market capitalisation of US$417m and burnt through US$220m last year, which is 53% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.
How Risky Is Agora's Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Agora's cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Summing up, we think the Agora's cash burn is a risk, based on the factors we mentioned in this article. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 2 warning signs for Agora that investors should know when investing in the stock.
Of course Agora 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.
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
About NasdaqGS:API
Agora
Operates in real-time engagement technology business in the People’s Republic of China, the United States, and internationally.
Excellent balance sheet and slightly overvalued.
