Is ARHT Media (CVE:ART) In A Good Position To Invest In Growth?
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. 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 ARHT Media (CVE:ART) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for ARHT Media
When Might ARHT Media Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. ARHT Media has such a small amount of debt that we'll set it aside, and focus on the CA$4.4m in cash it held at June 2021. Looking at the last year, the company burnt through CA$4.8m. That means it had a cash runway of around 11 months as of June 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. You can see how its cash balance has changed over time in the image below.
How Well Is ARHT Media Growing?
ARHT Media boosted investment sharply in the last year, with cash burn ramping by 93%. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 71% growth in revenue, over the very same year. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how ARHT Media is building its business over time.
Can ARHT Media Raise More Cash Easily?
ARHT Media seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. 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 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).
ARHT Media's cash burn of CA$4.8m is about 16% of its CA$31m market capitalisation. 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.
So, Should We Worry About ARHT Media's Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought ARHT Media's revenue growth was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Separately, we looked at different risks affecting the company and spotted 4 warning signs for ARHT Media (of which 2 don't sit too well with us!) you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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