We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Nanollose (ASX:NC6) shareholders should 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'.
How Long Is Nanollose's 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 Nanollose last reported its balance sheet in December 2019, it had zero debt and cash worth AU$585k. Importantly, its cash burn was AU$1.5m over the trailing twelve months. So it had a cash runway of approximately 5 months from December 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. Depicted below, you can see how its cash holdings have changed over time.
How Is Nanollose's Cash Burn Changing Over Time?
Whilst it's great to see that Nanollose has already begun generating revenue from operations, last year it only produced AU$698k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Given the length of the cash runway, we'd interpret the 23% reduction in cash burn, in twelve months, as prudent if not necessary for capital preservation. Admittedly, we're a bit cautious of Nanollose due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Easily Can Nanollose Raise Cash?
While Nanollose is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Nanollose's cash burn of AU$1.5m is about 81% of its AU$1.8m market capitalisation. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
Is Nanollose's Cash Burn A Worry?
There are no prizes for guessing that we think Nanollose's cash burn is a bit of a worry. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash burn relative to its market cap, its cash burn reduction is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Looking at the metrics in this article all together, we consider its cash burn situation to be rather dangerous, and likely to cost shareholders one way or the other. Taking a deeper dive, we've spotted 6 warning signs for Nanollose you should be aware of, and 4 of them can't be ignored.
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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