There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we'd take a look at whether Change Financial (ASX:CCA) shareholders should be worried about its 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Change Financial 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. As at December 2021, Change Financial had cash of US$1.6m and no debt. Importantly, its cash burn was US$2.3m over the trailing twelve months. That means it had a cash runway of around 8 months as of December 2021. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Importantly, if we extrapolate recent cash burn trends, the cash runway would be noticeably longer. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Change Financial Growing?
We reckon the fact that Change Financial managed to shrink its cash burn by 38% over the last year is rather encouraging. But it was the operating revenue growth of 248% that really shone. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Change Financial is growing revenue over time by checking this visualization of past revenue growth.
Can Change Financial Raise More Cash Easily?
Even though it seems like Change Financial is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future 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).
Since it has a market capitalisation of US$26m, Change Financial's US$2.3m in cash burn equates to about 8.7% of its market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Change Financial's Cash Burn?
On this analysis of Change Financial's cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Change Financial's situation. An in-depth examination of risks revealed 3 warning signs for Change Financial that readers should think about before committing capital to this stock.
Of course Change Financial 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.