We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for CommsChoice Group (ASX:CCG) shareholders is whether they should be concerned by its rate of 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might CommsChoice Group Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In June 2019, CommsChoice Group had AU$366k in cash, and was debt-free. Importantly, its cash burn was AU$2.3m over the trailing twelve months. Therefore, from June 2019 it had roughly 2 months of cash runway. To be frank we are alarmed by how short that cash runway is! Depicted below, you can see how its cash holdings have changed over time.
How Well Is CommsChoice Group Growing?
Some investors might find it troubling that CommsChoice Group is actually increasing its cash burn, which is up 31% in the last year. On a more positive note, the operating revenue improved by 100% over the period, offering an indication that the expenditure may well be worthwhile. If revenue is maintained once spending on growth decreases, that could well pay off! It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how CommsChoice Group is growing revenue over time by checking this visualization of past revenue growth.
How Hard Would It Be For CommsChoice Group To Raise More Cash For Growth?
Since CommsChoice Group has been boosting its cash burn, the market will likely be considering how it can raise more cash if need be. 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 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.
CommsChoice Group has a market capitalisation of AU$11m and burnt through AU$2.3m last year, which is 22% of the company's market value. 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 CommsChoice Group's Cash Burn?
On this analysis of CommsChoice Group's cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: CommsChoice Group insiders have been trading shares, according to our data. Click here to check whether insiders 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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