Yahoo Finance Here's Why We're Watching Adveritas' (ASX:AV1) Cash Burn Situation
There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Adveritas (ASX:AV1) shareholders should be worried about its cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). Let's start with an examination of the business' cash, relative to its cash burn.
Check out our latest analysis for Adveritas
When Might Adveritas Run Out Of Money?
A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When Adveritas last reported its balance sheet in December 2021, it had zero debt and cash worth AU$6.5m. In the last year, its cash burn was AU$8.3m. So it had a cash runway of approximately 9 months from December 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. The image below shows how its cash balance has been changing over the last few years.
How Is Adveritas' Cash Burn Changing Over Time?
In our view, Adveritas doesn't yet produce significant amounts of operating revenue, since it reported just AU$1.5m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. With the cash burn rate up 26% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. In reality, this article only makes a short study of the company's growth data. You can take a look at how Adveritas is growing revenue over time by checking this visualization of past revenue growth.
How Easily Can Adveritas Raise Cash?
Since its cash burn is moving in the wrong direction, Adveritas shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
Since it has a market capitalisation of AU$42m, Adveritas' AU$8.3m in cash burn equates to about 20% 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.
So, Should We Worry About Adveritas' Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Adveritas' cash burn relative to its market cap was relatively promising. Summing up, we think the Adveritas' cash burn is a risk, based on the factors we mentioned in this article. Separately, we looked at different risks affecting the company and spotted 6 warning signs for Adveritas (of which 2 are potentially serious!) you should know about.
Of course Adveritas 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
