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.
Given this risk, we thought we’d take a look at whether Kanabo Group (LON:KNB) shareholders should be worried about its 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). We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does Kanabo Group Have A Long Cash Runway?
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 Kanabo Group last reported its balance sheet in June 2021, it had zero debt and cash worth UK£6.0m. In the last year, its cash burn was UK£740k. So it had a cash runway of about 8.0 years from June 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
How Is Kanabo Group’s Cash Burn Changing Over Time?
In the last year, Kanabo Group did book revenue of UK£1.0k, but its revenue from operations was less, at just UK£1.0k. Given how low that operating leverage is, we think it’s too early to put much weight on the revenue growth, so we’ll focus on how the cash burn is changing, instead. Remarkably, it actually increased its cash burn by 232% in the last year. We certainly hope for shareholders’ sake that the money is well spent, because that kind of expenditure increase always makes us nervous. Kanabo Group makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.
Can Kanabo Group Raise More Cash Easily?
While Kanabo Group does have a solid cash runway, its cash burn trajectory may have some shareholders thinking ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
Kanabo Group has a market capitalisation of UK£48m and burnt through UK£740k last year, which is 1.5% of the company’s market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is Kanabo Group’s Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about Kanabo Group’s cash burn. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. 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. Taking a deeper dive, we’ve spotted 3 warning signs for Kanabo Group you should be aware of, and 1 of them doesn’t sit too well with us.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, 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.