Is Covalon Technologies (CVE:COV) In A Good Position To Deliver On Growth Plans?
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Covalon Technologies (CVE:COV) 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. Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Covalon Technologies
When Might Covalon Technologies Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2023, Covalon Technologies had CA$9.2m in cash, and was debt-free. In the last year, its cash burn was CA$5.9m. That means it had a cash runway of around 19 months as of June 2023. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.
How Well Is Covalon Technologies Growing?
We reckon the fact that Covalon Technologies managed to shrink its cash burn by 29% over the last year is rather encouraging. On top of that, operating revenue was up 30%, making for a heartening combination We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Covalon Technologies has developed its business over time by checking this visualization of its revenue and earnings history.
Can Covalon Technologies Raise More Cash Easily?
Covalon Technologies 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Covalon Technologies has a market capitalisation of CA$27m and burnt through CA$5.9m last year, which is 22% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Covalon Technologies' Cash Burn?
On this analysis of Covalon Technologies' cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap 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 Covalon Technologies' situation. Taking a deeper dive, we've spotted 3 warning signs for Covalon Technologies you should be aware of, and 2 of them are significant.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.
