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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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Althea Group Holdings (ASX:AGH) 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Althea Group Holdings
When Might Althea Group Holdings 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 Althea Group Holdings last reported its balance sheet in December 2021, it had zero debt and cash worth AU$9.9m. Importantly, its cash burn was AU$12m over the trailing twelve months. Therefore, from December 2021 it had roughly 10 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Althea Group Holdings Growing?
It was fairly positive to see that Althea Group Holdings reduced its cash burn by 34% during the last year. And arguably the operating revenue growth of 90% was even more impressive. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Althea Group Holdings is building its business over time.
Can Althea Group Holdings Raise More Cash Easily?
Althea Group Holdings 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. 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. 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.
Althea Group Holdings has a market capitalisation of AU$39m and burnt through AU$12m last year, which is 31% 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.