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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given this risk, we thought we'd take a look at whether Cresco Labs (CNSX:CL) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Cresco Labs Run Out Of Money?
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, Cresco Labs had US$61m in cash, and was debt-free. Importantly, its cash burn was US$67m over the trailing twelve months. That means it had a cash runway of around 11 months as of June 2019. Notably, analysts forecast that Cresco Labs will break even (at a free cash flow level) in about 11 months. So there's a very good chance it won't need more cash, when you consider the burn rate will be reducing in that period. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Cresco Labs Growing?
Notably, Cresco Labs actually ramped up its cash burn very hard and fast in the last year, by 192%, signifying heavy investment in the business. But shareholders are no doubt taking some confidence from the rockstar revenue growth of 315% during that same year. Considering both these factors, we're not particularly excited by its growth profile. 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 Easily Can Cresco Labs Raise Cash?
Given the trajectory of Cresco Labs's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. 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).
Cresco Labs has a market capitalisation of CA$639m and burnt through US$67m last year, which is 14% of the company's 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.
How Risky Is Cresco Labs's Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Cresco Labs is burning through its cash. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Cresco Labs 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 freelist of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.