Yahoo Finance We're Hopeful That Drone Delivery Canada (CVE:FLT) Will Use Its Cash Wisely
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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should Drone Delivery Canada (CVE:FLT) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
View our latest analysis for Drone Delivery Canada
When Might Drone Delivery Canada Run Out Of Money?
You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. As at September 2020, Drone Delivery Canada had cash of CA$13m and no debt. Importantly, its cash burn was CA$9.4m over the trailing twelve months. That means it had a cash runway of around 17 months as of September 2020. Notably, analysts forecast that Drone Delivery Canada will break even (at a free cash flow level) in about 23 months. Essentially, that means the company will either reduce its cash burn, or else require more cash. The image below shows how its cash balance has been changing over the last few years.
How Is Drone Delivery Canada's Cash Burn Changing Over Time?
Whilst it's great to see that Drone Delivery Canada has already begun generating revenue from operations, last year it only produced CA$63k, 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 40% over the last year suggests some degree of prudence. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For Drone Delivery Canada To Raise More Cash For Growth?
Even though it has reduced its cash burn recently, shareholders should still consider how easy it would be for Drone Delivery Canada to raise more cash in the future. 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 and fund growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Drone Delivery Canada's cash burn of CA$9.4m is about 7.1% of its CA$133m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Drone Delivery Canada's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Drone Delivery Canada is burning through its cash. For example, we think its cash burn relative to its market cap suggests that the company is on a good path. On this analysis its cash runway was its weakest feature, but we are not concerned about it. One real positive is that analysts are forecasting that the company will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. Separately, we looked at different risks affecting the company and spotted 3 warning signs for Drone Delivery Canada (of which 2 are a bit unpleasant!) you should know about.
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)
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.
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