There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should UP Fintech Holding (NASDAQ:TIGR) shareholders be worried about its 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might UP Fintech Holding Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. UP Fintech Holding has such a small amount of debt that we'll set it aside, and focus on the US$42m in cash it held at June 2019. In the last year, its cash burn was US$23m. That means it had a cash runway of around 22 months as of June 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is UP Fintech Holding Growing?
It was quite stunning to see that UP Fintech Holding increased its cash burn by 227% over the last year. While operating revenue was up over the same period, the 14% gain gives us scant comfort. Taken together, we think these growth metrics are a little worrying. In reality, this article only makes a short study of the company's growth data. You can take a look at how UP Fintech Holding has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can UP Fintech Holding Raise Cash?
UP Fintech Holding seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
UP Fintech Holding's cash burn of US$23m is about 3.3% of its US$687m 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.
Is UP Fintech Holding's Cash Burn A Worry?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought UP Fintech Holding's cash burn relative to its market cap was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the UP Fintech Holding CEO receives in total remuneration.
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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