We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should ParcelPal Technology (CNSX:PKG) 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. Let's start with an examination of the business's cash, relative to its cash burn.
How Long Is ParcelPal Technology's Cash Runway?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In June 2019, ParcelPal Technology had CA$619k in cash, and was debt-free. In the last year, its cash burn was CA$2.9m. So it had a cash runway of approximately 3 months from June 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. You can see how its cash balance has changed over time in the image below.
How Well Is ParcelPal Technology Growing?
It was quite stunning to see that ParcelPal Technology increased its cash burn by 208% over the last year. Of course, the truly verdant revenue growth of 102% in that time may well justify the growth spend. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how ParcelPal Technology is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For ParcelPal Technology To Raise More Cash For Growth?
Given the trajectory of ParcelPal Technology's cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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).
ParcelPal Technology's cash burn of CA$2.9m is about 38% of its CA$7.6m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About ParcelPal Technology's Cash Burn?
On this analysis of ParcelPal Technology's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that ParcelPal Technology insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
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