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We can readily understand why investors are attracted to unprofitable companies. For example, Altisource Asset Management (NYSEMKT:AAMC) shareholders have done very well over the last year, with the share price soaring by 137%. 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 notwithstanding the buoyant share price, we think it's well worth asking whether Altisource Asset Management'scash burn is too risky For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Altisource Asset Management Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2020, Altisource Asset Management had US$30m in cash, and was debt-free. Looking at the last year, the company burnt through US$5.7m. That means it had a cash runway of about 5.3 years as of June 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Well Is Altisource Asset Management Growing?
At first glance it's a bit worrying to see that Altisource Asset Management actually boosted its cash burn by 43%, year on year. To be fair, given that fact it's hardly inspiring to see that the operating revenue was flat year on year. Considering both these metrics, we're a little concerned about how the company is developing. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Altisource Asset Management is building its business over time.
How Hard Would It Be For Altisource Asset Management To Raise More Cash For Growth?
While Altisource Asset Management 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. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).
Altisource Asset Management's cash burn of US$5.7m is about 15% of its US$39m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
So, Should We Worry About Altisource Asset Management's Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Altisource Asset Management's cash runway was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Altisource Asset Management's situation. On another note, Altisource Asset Management has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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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