Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Baumart Holdings (ASX:BMH) 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. Let's start with an examination of the business' cash, relative to its cash burn.
Does Baumart Holdings Have A Long Cash Runway?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2020, Baumart Holdings had AU$289k in cash, and was debt-free. In the last year, its cash burn was AU$270k. Therefore, from June 2020 it had roughly 13 months of cash runway. Importantly, though, the one analyst we see covering the stock thinks that Baumart Holdings will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.
How Well Is Baumart Holdings Growing?
Notably, Baumart Holdings actually ramped up its cash burn very hard and fast in the last year, by 161%, signifying heavy 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 these two factors together makes us nervous about the direction the company seems to be heading. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Baumart Holdings is building its business over time.
How Easily Can Baumart Holdings Raise Cash?
Since Baumart Holdings can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Since it has a market capitalisation of AU$29m, Baumart Holdings' AU$270k in cash burn equates to about 0.9% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Baumart Holdings' Cash Burn?
As you can probably tell by now, we're not too worried about Baumart Holdings' cash burn. In particular, we think its cash burn relative to its market cap stands out as evidence that the company is well on top of its spending. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. There's no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Baumart Holdings that investors should know when investing in the stock.
Of course Baumart Holdings may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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