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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should ARHT Media (CVE:ART) shareholders be worried about its 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. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
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When Might ARHT Media 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 September 2022, ARHT Media had cash of CA$6.5m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was CA$8.1m. So it had a cash runway of approximately 10 months from September 2022. Importantly, the one analyst we see covering the stock thinks that ARHT Media will reach cashflow breakeven in 3 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is ARHT Media Growing?
ARHT Media boosted investment sharply in the last year, with cash burn ramping by 65%. While that certainly gives us pause for thought, we take a lot of comfort in the strong annual revenue growth of 66%. On balance, we’d say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For ARHT Media To Raise More Cash For Growth?
Even though it seems like ARHT Media is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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 CA$34m, ARHT Media’s CA$8.1m in cash burn equates to about 24% of its market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
So, Should We Worry About ARHT Media’s Cash Burn?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought ARHT Media’s revenue growth was relatively promising. Shareholders can take heart from the fact that at least one analyst is forecasting it will reach breakeven. We don’t think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. An in-depth examination of risks revealed 5 warning signs for ARHT Media that readers should think about before committing capital to this stock.
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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.