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 Seafarms Group (ASX:SFG) 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Seafarms Group Have A Long Cash Runway?
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. When Seafarms Group last reported its balance sheet in June 2022, it had zero debt and cash worth AU$36m. In the last year, its cash burn was AU$63m. So it had a cash runway of approximately 7 months from June 2022. 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. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Seafarms Group Growing?
It was quite stunning to see that Seafarms Group increased its cash burn by 276% over the last year. While that's concerning on it's own, the fact that operating revenue was actually down 4.4% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Seafarms Group is building its business over time.
How Hard Would It Be For Seafarms Group To Raise More Cash For Growth?
Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily Seafarms Group could raise cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Since it has a market capitalisation of AU$58m, Seafarms Group's AU$63m in cash burn equates to about 108% of its market value. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
How Risky Is Seafarms Group's Cash Burn Situation?
There are no prizes for guessing that we think Seafarms Group's cash burn is a bit of a worry. In particular, we think its cash burn relative to its market cap suggests it isn't in a good position to keep funding growth. And although we accept its falling revenue wasn't as worrying as its cash burn relative to its market cap, it was still a real negative; as indeed were all the factors we considered in this article. The measures we've considered in this article lead us to believe its cash burn is actually quite concerning, and its weak cash position seems likely to cost shareholders one way or another. Taking a deeper dive, we've spotted 4 warning signs for Seafarms Group you should be aware of, and 2 of them don't sit too well with us.
Of course Seafarms Group 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.
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.
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