Companies Like Crimson Tide (LON:TIDE) Are In A Position To Invest In Growth
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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Crimson Tide (LON:TIDE) 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'.
View our latest analysis for Crimson Tide
How Long Is Crimson Tide's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2022, Crimson Tide had cash of UK£3.6m and no debt. Importantly, its cash burn was UK£2.0m over the trailing twelve months. So it had a cash runway of approximately 21 months from December 2022. Importantly, though, the one analyst we see covering the stock thinks that Crimson Tide will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Crimson Tide Growing?
Notably, Crimson Tide actually ramped up its cash burn very hard and fast in the last year, by 126%, signifying heavy investment in the business. But the silver lining is that operating revenue increased by 30% in that time. In light of the data above, we're fairly sanguine about the business growth trajectory. 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.
Can Crimson Tide Raise More Cash Easily?
Crimson Tide 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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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 UK£18m, Crimson Tide's UK£2.0m in cash burn equates to about 11% 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.
So, Should We Worry About Crimson Tide's Cash Burn?
As you can probably tell by now, we're not too worried about Crimson Tide's cash burn. For example, we think its revenue growth suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 1 warning sign for Crimson Tide that potential shareholders should take into account before putting money into a stock.
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)
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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.
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