Yahoo Finance Here's Why We're Not Too Worried About Aimia's (TSE:AIM) Cash Burn Situation
Just because a business does not make any money, does not mean that the stock will go down. 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.
So should Aimia (TSE:AIM) shareholders 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. Let's start with an examination of the business's cash, relative to its cash burn.
See our latest analysis for Aimia
How Long Is Aimia's Cash Runway?
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. When Aimia last reported its balance sheet in September 2019, it had zero debt and cash worth CA$270m. Looking at the last year, the company burnt through CA$76m. Therefore, from September 2019 it had 3.5 years of cash runway. There's no doubt that this is a reassuringly long runway. We should note, however, that if we extrapolate recent trends in its cash burn, then its cash runway would get a lot longer. Depicted below, you can see how its cash holdings have changed over time.
Can Aimia Raise More Cash Easily?
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 to fund 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).
Aimia has a market capitalisation of CA$327m and burnt through CA$76m last year, which is 23% of the company's 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.
How Risky Is Aimia's Cash Burn Situation?
Given it's an early stage company, we don't have a lot of data with which to judge Aimia's cash burn. Having said that, we can say that its cash runway was a real positive. The bottom line is that we think its cash burn seems fairly reasonable, given it is still chasing growth. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Aimia insiders have been trading shares in the company. Click here to find out if they 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)
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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