Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. 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.
Given this risk, we thought we’d take a look at whether Century Global Commodities (TSE:CNT) 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). Let’s start with an examination of the business’s cash, relative to its cash burn.
Does Century Global Commodities Have A Long 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. In December 2019, Century Global Commodities had CA$6.0m in cash, and was debt-free. Importantly, its cash burn was CA$4.2m over the trailing twelve months. So it had a cash runway of approximately 17 months from December 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 Century Global Commodities Growing?
On balance, we think it’s mildly positive that Century Global Commodities trimmed its cash burn by 9.8% over the last twelve months. On top of that, operating revenue was up 42%, making for a heartening combination We think it is growing rather well, upon reflection. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. This graph of historic revenue growth shows how Century Global Commodities is building its business over time.
How Easily Can Century Global Commodities Raise Cash?
Even though it seems like Century Global Commodities is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Since it has a market capitalisation of CA$6.9m, Century Global Commodities’s CA$4.2m in cash burn equates to about 60% of its market value. Given how large that cash burn is, relative to the market value of the entire company, we’d consider it to be a high risk stock, with the real possibility of extreme dilution.
Is Century Global Commodities’s Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Century Global Commodities’s revenue growth was relatively promising. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Century Global Commodities has 3 warning signs (and 2 which don’t sit too well with us) we think you should know about.
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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