Just because a business does not make any money, does not mean that the stock will go down. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether Medcolcanna Organics (CVE:MCCN) shareholders should 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Medcolcanna Organics Have A Long Cash Runway?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Medcolcanna Organics last reported its balance sheet in March 2020, it had zero debt and cash worth CA$1.1m. In the last year, its cash burn was CA$6.8m. So it had a cash runway of approximately 2 months from March 2020. It's extremely surprising to us that the company has allowed its cash runway to get that short! The image below shows how its cash balance has been changing over the last few years.
How Is Medcolcanna Organics's Cash Burn Changing Over Time?
Whilst it's great to see that Medcolcanna Organics has already begun generating revenue from operations, last year it only produced CA$29k, so we don't think it is generating significant revenue, at this point. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Remarkably, it actually increased its cash burn by 272% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Medcolcanna Organics makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Medcolcanna Organics To Raise More Cash For Growth?
Given its cash burn trajectory, Medcolcanna Organics shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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).
Medcolcanna Organics's cash burn of CA$6.8m is about 65% of its CA$10m market capitalisation. Given how large that cash burn is, relative to the market value of the entire company, we'd consider it to be a high risk stock, with the real possibility of extreme dilution.
How Risky Is Medcolcanna Organics's Cash Burn Situation?
As you can probably tell by now, we're rather concerned about Medcolcanna Organics's cash burn. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. While not as bad as its cash runway, its cash burn relative to its market cap is also a concern, and considering everything mentioned above, we're struggling to find much to be optimistic about. Its cash burn burn situation feels about as relaxing as riding your bicycle home in the rain without so much as a jumper. The need for more cash seems just around the corner, and any dilution is likely to be rather severe. On another note, we conducted an in-depth investigation of the company, and identified 8 warning signs for Medcolcanna Organics (5 make us uncomfortable!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
Love or hate this article? Concerned about the content? Get in touch with us directly. Alternatively, email email@example.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. 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.