Yahoo Finance We're Keeping An Eye On Posera's (TSE:PAY) Cash Burn Rate
Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So should Posera (TSE:PAY) 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 Posera
How Long Is Posera'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. As at June 2019, Posera had cash of CA$4.8m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through CA$2.8m. 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. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Posera Growing?
We reckon the fact that Posera managed to shrink its cash burn by 37% over the last year is rather encouraging. But the revenue dip of 17% in the same period was a bit concerning. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Posera is building its business over time.
Can Posera Raise More Cash Easily?
Posera seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.
Posera has a market capitalisation of CA$7.2m and burnt through CA$2.8m last year, which is 39% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.
So, Should We Worry About Posera's Cash Burn?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Posera's cash burn reduction was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. For us, it's always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Posera CEO receives in total remuneration.
Of course Posera may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
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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. Thank you for reading.
