Yahoo Finance Here's Why We're Watching CAP-XX's (LON:CPX) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether CAP-XX (LON:CPX) shareholders should 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'. Let's start with an examination of the business' cash, relative to its cash burn.
See 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 June 2020, it had zero debt and cash worth AU$2.9m. Importantly, its cash burn was AU$5.5m over the trailing twelve months. That means it had a cash runway of around 6 months as of June 2020. 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. The image below shows how its cash balance has been changing over the last few years.
How Well Is CAP-XX Growing?
CAP-XX boosted investment sharply in the last year, with cash burn ramping by 98%. While operating revenue was up over the same period, the 12% gain gives us scant comfort. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how CAP-XX is building its business over time.
How Hard Would It Be For CAP-XX To Raise More Cash For Growth?
Given the trajectory of CAP-XX's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
CAP-XX has a market capitalisation of AU$35m and burnt through AU$5.5m last year, which is 16% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
Is CAP-XX's Cash Burn A Worry?
On this analysis of CAP-XX's cash burn, we think its revenue growth was reassuring, while its cash runway has us a bit worried. Summing up, we think the CAP-XX's cash burn is a risk, based on the factors we mentioned in this article. On another note, CAP-XX has 6 warning signs (and 2 which are a bit concerning) we think you should know about.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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. 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.
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