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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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Planet Green Holdings (NYSEMKT:PLAG) shareholders should 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.
How Long Is Planet Green Holdings' 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. As at September 2020, Planet Green Holdings had cash of US$5.6m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through US$3.0m. That means it had a cash runway of around 22 months as of September 2020. Importantly, though, the one analyst we see covering the stock thinks that Planet Green Holdings will reach cashflow breakeven before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.
How Well Is Planet Green Holdings Growing?
Planet Green Holdings managed to reduce its cash burn by 79% over the last twelve months, which suggests it's on the right flight path. And revenue is up 47% in that same period; also a good sign. Overall, we'd say its growth is rather impressive. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Planet Green Holdings is building its business over time.
Can Planet Green Holdings Raise More Cash Easily?
While Planet Green Holdings seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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).
Planet Green Holdings' cash burn of US$3.0m is about 13% of its US$23m market capitalisation. 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.
How Risky Is Planet Green Holdings' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Planet Green Holdings' cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Its cash burn relative to its market cap wasn't quite as good, but was still rather encouraging! It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking an in-depth view of risks, we've identified 2 warning signs for Planet Green Holdings that you should be aware of before investing.
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)
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. 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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