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We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Ava Risk Group (ASX:AVA) 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.
When Might Ava Risk Group Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, Ava Risk Group had AU$3.1m in cash, and was debt-free. In the last year, its cash burn was AU$4.6m. 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. The image below shows how its cash balance has been changing over the last few years.
How Well Is Ava Risk Group Growing?
One thing for shareholders to keep front in mind is that Ava Risk Group increased its cash burn by 694% in the last twelve months. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 59% growth in revenue, over the very same year. 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. You can take a look at how Ava Risk Group is growing revenue over time by checking this visualization of past revenue growth.
Can Ava Risk Group Raise More Cash Easily?
Given the trajectory of Ava Risk Group'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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
Ava Risk Group's cash burn of AU$4.6m is about 14% of its AU$33m market capitalisation. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is Ava Risk Group's Cash Burn Situation?
On this analysis of Ava Risk Group's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Summing up, we think the Ava Risk Group's cash burn is a risk, based on the factors we mentioned in this article. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Ava Risk Group insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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 email@example.com. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.