Companies Like CubicFarm Systems (CVE:CUB) Can Be Considered Quite Risky
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 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 CubicFarm Systems (CVE:CUB) shareholders 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
See our latest analysis for CubicFarm Systems
When Might CubicFarm Systems 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. As at September 2019, CubicFarm Systems had cash of CA$5.6m and no debt. Looking at the last year, the company burnt through CA$9.7m. Therefore, from September 2019 it had roughly 7 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is CubicFarm Systems's Cash Burn Changing Over Time?
In the last year, CubicFarm Systems did book revenue of CA$5.6m, but its revenue from operations was less, at just CA$5.6m. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. Remarkably, it actually increased its cash burn by 253% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how CubicFarm Systems has developed its business over time by checking this visualization of its revenue and earnings history.
Can CubicFarm Systems Raise More Cash Easily?
Since its cash burn is moving in the wrong direction, CubicFarm Systems shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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 CA$33m, CubicFarm Systems's CA$9.7m in cash burn equates to about 29% of its market value. That's not insignificant, and if the company had to sell enough shares to fund another year's growth at the current share price, you'd likely witness fairly costly dilution.
Is CubicFarm Systems's Cash Burn A Worry?
CubicFarm Systems is not in a great position when it comes to its cash burn situation. While its cash burn relative to its market cap wasn't too bad, its increasing cash burn does leave us rather nervous. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the CubicFarm Systems CEO is paid..
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.
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