There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So, the natural question for Liquidity Services (NASDAQ:LQDT) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Liquidity Services's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2019, Liquidity Services had cash of US$66m and no debt. Importantly, its cash burn was US$14m over the trailing twelve months. That means it had a cash runway of about 4.6 years as of June 2019. A runway of this length affords the company the time and space it needs to develop the business. You can see how its cash balance has changed over time in the image below.
How Well Is Liquidity Services Growing?
It was fairly positive to see that Liquidity Services reduced its cash burn by 28% during the last year. But the revenue dip of 5.5% in the same period was a bit concerning. 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 Liquidity Services Raise More Cash Easily?
We are certainly impressed with the progress Liquidity Services has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. 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).
Liquidity Services's cash burn of US$14m is about 5.7% of its US$252m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.
How Risky Is Liquidity Services's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Liquidity Services is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Notably, our data indicates that Liquidity Services insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
If you would prefer to check out another company with better fundamentals, then do not miss this freelist 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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