Yahoo Finance Here's Why We Worry About Experion Holdings's (CVE:EXP) 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. 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 Experion Holdings (CVE:EXP) 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. Let's start with an examination of the business's cash, relative to its cash burn.
Check out our latest analysis for Experion Holdings
Does Experion Holdings Have A Long 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. In February 2020, Experion Holdings had CA$3.4m in cash, and was debt-free. In the last year, its cash burn was CA$9.2m. Therefore, from February 2020 it had roughly 4 months of cash runway. That's a very short cash runway which indicates an imminent need to douse the cash burn or find more funding. Depicted below, you can see how its cash holdings have changed over time.
How Is Experion Holdings's Cash Burn Changing Over Time?
Although Experion Holdings had revenue of CA$1.8m in the last twelve months, its operating revenue was only CA$1.8m in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. During the last twelve months, its cash burn actually ramped up 94%. Oftentimes, increased cash burn simply means a company is accelerating its business development, but one should always be mindful that this causes the cash runway to shrink. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Experion Holdings is building its business over time.
Can Experion Holdings Raise More Cash Easily?
Given its cash burn trajectory, Experion Holdings shareholders should already be thinking about how easy it might be for it to raise further cash in the future. 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. 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.
In the last year, Experion Holdings burned through CA$9.2m, which is just about equal to its CA$9.0m market cap. That suggests the company may have some funding difficulties, and we'd be very wary of the stock.
So, Should We Worry About Experion Holdings's Cash Burn?
As you can probably tell by now, we're rather concerned about Experion Holdings's cash burn. Take, for example, its cash burn relative to its market cap, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash burn relative to its market cap, its increasing cash burn is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Its cash burn situation feels about as comfortable as sitting next to the lavatory on a long haul flight. It's likely to need more cash in the near term; and that could well hurt returns. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for Experion Holdings (3 are significant!) that you should be aware of before investing here.
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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. Thank you for reading.
