There's no doubt that money can be made by owning shares of unprofitable businesses. 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.
Given this risk, we thought we'd take a look at whether CV Check (ASX:CV1) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business's cash, relative to its cash burn.
When Might CV Check Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When CV Check last reported its balance sheet in December 2019, it had zero debt and cash worth AU$5.8m. Looking at the last year, the company burnt through AU$202k. So it had a very long cash runway of many years from December 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Well Is CV Check Growing?
Given our focus on CV Check's cash burn, we're delighted to see that it reduced its cash burn by a nifty 90%. However, operating revenue growth was flat over the period. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how CV Check is building its business over time.
How Hard Would It Be For CV Check To Raise More Cash For Growth?
While CV Check 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
CV Check has a market capitalisation of AU$26m and burnt through AU$202k last year, which is 0.8% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is CV Check's Cash Burn A Worry?
As you can probably tell by now, we're not too worried about CV Check's cash burn. For example, we think its cash burn reduction suggests that the company is on a good path. Its weak point is its revenue growth, but even that wasn't too bad! After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that CV Check insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
If you spot an error that warrants correction, please contact the editor at email@example.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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