We can readily understand why investors are attracted to unprofitable companies. 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.
So, the natural question for THC Global Group (ASX:THC) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is THC Global Group's Cash Runway?
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. In June 2019, THC Global Group had AU$5.7m in cash, and was debt-free. Importantly, its cash burn was AU$6.6m over the trailing twelve months. Therefore, from June 2019 it had roughly 10 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is THC Global Group Growing?
On balance, we think it's mildly positive that THC Global Group trimmed its cash burn by 12% over the last twelve months. On top of that, operating revenue was up 26%, making for a heartening combination Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how THC Global Group is building its business over time.
Can THC Global Group Raise More Cash Easily?
While THC Global Group seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 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.
THC Global Group has a market capitalisation of AU$52m and burnt through AU$6.6m last year, which is 13% 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.
So, Should We Worry About THC Global Group's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought THC Global Group's revenue growth was relatively promising. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Notably, our data indicates that THC Global Group insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.