Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Property Connect Holdings (ASX:PCH) shareholders is whether they should be concerned by its rate of cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business's cash, relative to its cash burn.
Does Property Connect Holdings Have A Long Cash Runway?
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 Property Connect Holdings last reported its balance sheet in June 2019, it had zero debt and cash worth AU$504k. Importantly, its cash burn was AU$726k over the trailing twelve months. So it had a cash runway of approximately 8 months from June 2019. 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. Depicted below, you can see how its cash holdings have changed over time.
How Is Property Connect Holdings's Cash Burn Changing Over Time?
Whilst it's great to see that Property Connect Holdings has already begun generating revenue from operations, last year it only produced AU$345k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. As it happens, the company's cash burn reduced by 39% over the last year, which suggests that management are mindful of the possibility of running out of cash. Property Connect Holdings makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
How Hard Would It Be For Property Connect Holdings To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Property Connect Holdings to 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. Commonly, a business will sell new shares in itself to raise cash to drive 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).
Property Connect Holdings has a market capitalisation of AU$2.1m and burnt through AU$726k last year, which is 35% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
How Risky Is Property Connect Holdings's Cash Burn Situation?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Property Connect Holdings's cash burn reduction was relatively promising. Summing up, we think the Property Connect Holdings's cash burn is a risk, based on the factors we mentioned in this article. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Property Connect Holdings's CEO gets paid each year.
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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