We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for SRAX (NASDAQ:SRAX) shareholders is whether they should be concerned by its rate of 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might SRAX 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. In June 2019, SRAX had US$2.5m in cash, and was debt-free. Importantly, its cash burn was US$23m over the trailing twelve months. That means it had a cash runway of around 1 months as of June 2019. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.
How Well Is SRAX Growing?
It was quite stunning to see that SRAX increased its cash burn by 543% over the last year. And that is all the more of a concern in light of the fact that operating revenue was actually down by 76% in the last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction the company seems to be heading. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can SRAX Raise More Cash Easily?
Since SRAX's revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, if need be. 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).
SRAX's cash burn of US$23m is about 65% of its US$35m market capitalisation. That's very high expenditure relative to the company's size, suggesting it is an extremely high risk stock.
How Risky Is SRAX's Cash Burn Situation?
There are no prizes for guessing that we think SRAX's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its cash burn relative to its market cap is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Its cash burn situation feels about as comfortable as sitting next to the lavatory on a long haul flight. The need for more cash seems just around the corner, and any dilution is likely to be rather severe. Notably, our data indicates that SRAX insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this freelist of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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