We can readily understand why investors are attracted to unprofitable companies. Indeed, archTIS (ASX:AR9) stock is up 189% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
In light of its strong share price run, we think now is a good time to investigate how risky archTIS' cash burn is. 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). Let's start with an examination of the business' cash, relative to its cash burn.
Does archTIS 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. In June 2020, archTIS had AU$2.4m in cash, and was debt-free. Importantly, its cash burn was AU$2.8m over the trailing twelve months. So it had a cash runway of approximately 10 months from June 2020. 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. The image below shows how its cash balance has been changing over the last few years.
How Is archTIS' Cash Burn Changing Over Time?
In our view, archTIS doesn't yet produce significant amounts of operating revenue, since it reported just AU$549k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. As it happens, the company's cash burn reduced by 49% over the last year, which suggests that management are mindful of the possibility of running out of cash. archTIS makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
Can archTIS Raise More Cash Easily?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for archTIS to raise more cash in the future. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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$69m, archTIS' AU$2.8m in cash burn equates to about 4.1% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
Is archTIS' Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought archTIS' cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, we conducted an in-depth investigation of the company, and identified 6 warning signs for archTIS (3 can't be ignored!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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