Yahoo Finance Will Legend Power Systems (CVE:LPS) Spend Its Cash Wisely?
We can readily understand why investors are attracted to unprofitable companies. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Legend Power Systems (CVE:LPS) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for Legend Power Systems
How Long Is Legend Power Systems's 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 Legend Power Systems last reported its balance sheet in June 2019, it had zero debt and cash worth CA$7.2m. Looking at the last year, the company burnt through CA$4.0m. That means it had a cash runway of around 21 months as of June 2019. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. The image below shows how its cash balance has been changing over the last few years.
How Well Is Legend Power Systems Growing?
Some investors might find it troubling that Legend Power Systems is actually increasing its cash burn, which is up 30% in the last year. The fact that operating revenue was down 51% only gives us further disquiet. Considering both these metrics, we're a little concerned about how the company is developing. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Legend Power Systems has developed its business over time by checking this visualization of its revenue and earnings history.
Can Legend Power Systems Raise More Cash Easily?
Even though it seems like Legend Power Systems 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to 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.
Legend Power Systems's cash burn of CA$4.0m is about 26% of its CA$15m market capitalisation. 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 Legend Power Systems's Cash Burn?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Legend Power Systems's cash runway was relatively promising. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Legend Power Systems insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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.
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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