There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Allegra Orthopaedics (ASX:AMT) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Allegra Orthopaedics Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Allegra Orthopaedics last reported its balance sheet in December 2019, it had zero debt and cash worth AU$288k. In the last year, its cash burn was AU$1.3m. That means it had a cash runway of around 3 months as of December 2019. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. You can see how its cash balance has changed over time in the image below.
How Well Is Allegra Orthopaedics Growing?
At first glance it's a bit worrying to see that Allegra Orthopaedics actually boosted its cash burn by 20%, year on year. The revenue growth of 7.5% gives a ray of hope, at the very least. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Allegra Orthopaedics is building its business over time.
How Hard Would It Be For Allegra Orthopaedics To Raise More Cash For Growth?
Given the trajectory of Allegra Orthopaedics's cash burn, many investors will already be thinking about how it might raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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).
Since it has a market capitalisation of AU$11m, Allegra Orthopaedics's AU$1.3m in cash burn equates to about 12% of its market value. 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.
Is Allegra Orthopaedics's Cash Burn A Worry?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Allegra Orthopaedics's cash burn relative to its market cap was relatively promising. Summing up, we think the Allegra Orthopaedics's cash burn is a risk, based on the factors we mentioned in this article. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the Allegra Orthopaedics CEO is paid..
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)
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