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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Limelight Networks (NASDAQ:LLNW) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is Limelight Networks's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2019, Limelight Networks had US$18m in cash, and was debt-free. In the last year, its cash burn was US$34m. That means it had a cash runway of around 6 months as of September 2019. Notably, analysts forecast that Limelight Networks will break even (at a free cash flow level) in about 12 months. That means it doesn't have a great deal of breathing room, but it shouldn't really need more cash, considering that cash burn should be continually reducing. You can see how its cash balance has changed over time in the image below.
How Well Is Limelight Networks Growing?
It was quite stunning to see that Limelight Networks increased its cash burn by 2158% over the last year. While that's concerning on it's own, the fact that operating revenue was actually down 7.7% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For Limelight Networks To Raise More Cash For Growth?
Since Limelight Networks's revenue is down, and its cash burn is up, shareholders would quite reasonably be considering whether it can raise more money easily, if need be. 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. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Limelight Networks has a market capitalisation of US$451m and burnt through US$34m last year, which is 7.5% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Limelight Networks's Cash Burn?
On this analysis of Limelight Networks's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. 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. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Limelight Networks insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
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