Just because a business does not make any money, does not mean that the stock will go down. For example, Total Brain (ASX:TTB) shareholders have done very well over the last year, with the share price soaring by 138%. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So notwithstanding the buoyant share price, we think it's well worth asking whether Total Brain's cash burn is too risky In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
How Long Is Total Brain's Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at June 2019, Total Brain had cash of AU$5.2m and no debt. Looking at the last year, the company burnt through AU$8.3m. So it had a cash runway of approximately 8 months from June 2019. Importantly, the one analyst we see covering the stock thinks that Total Brain will reach cashflow breakeven in 2 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 Total Brain Growing?
At first glance it's a bit worrying to see that Total Brain actually boosted its cash burn by 48%, 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. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Total Brain To Raise More Cash For Growth?
Since Total Brain can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash 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 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).
Total Brain's cash burn of AU$8.3m is about 9.9% of its AU$84m 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 Total Brain's Cash Burn Situation?
On this analysis of Total Brain's cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Notably, our data indicates that Total Brain insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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