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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Rafael Holdings (NYSE:RFL) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. Let's start with an examination of the business's cash, relative to its cash burn.
How Long Is Rafael Holdings's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In January 2020, Rafael Holdings had US$9.5m in cash, and was debt-free. Looking at the last year, the company burnt through US$4.1m. That means it had a cash runway of about 2.3 years as of January 2020. That's decent, giving the company a couple years to develop its business. The image below shows how its cash balance has been changing over the last few years.
How Well Is Rafael Holdings Growing?
Rafael Holdings actually ramped up its cash burn by a whopping 50% in the last year, which shows it is boosting investment in the business. That's not ideal, but we're made even more nervous given that operating revenue was flat over the same period. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how Rafael Holdings has developed its business over time by checking this visualization of its revenue and earnings history.
Can Rafael Holdings Raise More Cash Easily?
Even though it seems like Rafael Holdings is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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 US$203m, Rafael Holdings's US$4.1m in cash burn equates to about 2.0% of its market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
Is Rafael Holdings's Cash Burn A Worry?
On this analysis of Rafael Holdings's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. Separately, we looked at different risks affecting the company and spotted 4 warning signs for Rafael Holdings (of which 1 is concerning!) you should know about.
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.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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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