Yahoo Finance CAP-XX (LON:CPX) Will Have To Spend Its Cash Wisely
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should CAP-XX (LON:CPX) shareholders 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for CAP-XX
How Long Is CAP-XX's Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When CAP-XX last reported its balance sheet in December 2019, it had zero debt and cash worth AU$1.8m. Looking at the last year, the company burnt through AU$2.9m. So it had a cash runway of approximately 7 months from December 2019. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
How Well Is CAP-XX Growing?
One thing for shareholders to keep front in mind is that CAP-XX increased its cash burn by 884% in the last twelve months. While that's concerning on it's own, the fact that operating revenue was actually down 29% over the same period makes us positively tremulous. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how CAP-XX has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can CAP-XX Raise Cash?
Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily CAP-XX could raise cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
CAP-XX has a market capitalisation of AU$17m and burnt through AU$2.9m last year, which is 17% 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 CAP-XX's Cash Burn?
On this analysis of CAP-XX's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn 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. Separately, we looked at different risks affecting the company and spotted 7 warning signs for CAP-XX (of which 2 make us uncomfortable!) you should know about.
Of course CAP-XX 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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
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