There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, although Salesforce.com’s software-as-a-service business lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making the company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether Chronos Group (TSE:CRON) 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.
See our latest analysis for the Cronos Group
When Might Cronos Group 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. When Cronos Group last reported its balance sheet in March 2023, it had zero debt and cash worth US$836m. Importantly, its cash burn was US$108m over the trailing twelve months. That means it had a cash runway of about 7.8 years as of March 2023. Notably, however, analysts think that Cronos Group will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has changed over the last few years.
How Well Is Cronos Group Growing?
We recognize the fact that Cronos Group managed to shrink its cash burn by 27% over the last year is rather encouraging. Having said that, the flat operating revenue was a bit mundane. On balance, we’d say the company is improving over time. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
Can Cronos Group Raise More Cash Easily?
There’s no doubt Cronos Group seems to be in a fairly good position, when it comes to managing its cash burn, but even if it’s only hypothetical, it’s always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. By comparing a company’s annual cash burn to its total market capitalisation, we can roughly estimate how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Cronos Group’s cash burn of US$108m is about 14% of its US$750m market capitalization. As a result, we’d venture that the company could raise more cash for growth without much trouble, even if at the cost of some dilution.
How Risky Is Cronos Group’s Cash Burn Situation?
The good news is that in our view Cronos Group’s cash burn situation gives shareholders real reason for optimism. Not only was its cash burn reduction quite good, but its cash runway was a real positive. One real positive is that analysts are forecasting that the company will reach breakeven. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. We think it’s very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Cronos Group’s CEO gets paid each year.
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)
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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