Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for AgEagle Aerial Systems (NYSEMKT:UAVS) shareholders is whether they should be concerned by its rate of cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does AgEagle Aerial Systems Have A Long 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. When AgEagle Aerial Systems last reported its balance sheet in September 2019, it had zero debt and cash worth US$1.4m. Looking at the last year, the company burnt through US$912k. So it had a cash runway of approximately 18 months from September 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. You can see how its cash balance has changed over time in the image below.
How Is AgEagle Aerial Systems's Cash Burn Changing Over Time?
Whilst it's great to see that AgEagle Aerial Systems has already begun generating revenue from operations, last year it only produced US$145k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Notably, its cash burn was actually down by 55% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. AgEagle Aerial Systems makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can AgEagle Aerial Systems Raise More Cash Easily?
While we're comforted by the recent reduction evident from our analysis of AgEagle Aerial Systems's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Since it has a market capitalisation of US$6.5m, AgEagle Aerial Systems's US$912k in cash burn equates to about 14% of its market value. 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.
Is AgEagle Aerial Systems's Cash Burn A Worry?
The good news is that in our view AgEagle Aerial Systems's cash burn situation gives shareholders real reason for optimism. One the one hand we have its solid cash burn relative to its market cap, while on the other it can also boast very strong cash burn reduction. 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. While we always like to monitor cash burn for early stage companies, qualitative factors such as the CEO pay can also shed light on the situation. Click here to see free what the AgEagle Aerial Systems CEO is paid..
Of course AgEagle Aerial Systems may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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