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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Jumia Technologies (NYSE:JMIA) 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's cash, relative to its cash burn.
How Long Is Jumia Technologies'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. As at December 2019, Jumia Technologies had cash of €232m and no debt. Importantly, its cash burn was €188m over the trailing twelve months. That means it had a cash runway of around 15 months as of December 2019. Notably, analysts forecast that Jumia Technologies will break even (at a free cash flow level) in about 5 years. Essentially, that means the company will either reduce its cash burn, or else require more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Jumia Technologies Growing?
At first glance it's a bit worrying to see that Jumia Technologies actually boosted its cash burn by 32%, year on year. The good news is that operating revenue increased by 24% in the last year, indicating that the business is gaining some traction. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Jumia Technologies Raise More Cash Easily?
While Jumia Technologies seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Jumia Technologies's cash burn of €188m is about 62% of its €306m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
So, Should We Worry About Jumia Technologies's Cash Burn?
On this analysis of Jumia Technologies's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. An in-depth examination of risks revealed 3 warning signs for Jumia Technologies that readers should think about before committing capital to this stock.
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.
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