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Just because a business does not make any money, does not mean that the stock will go down. 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 Bubs Australia (ASX:BUB) 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 Bubs Australia
How Long Is Bubs Australia'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 December 2023, Bubs Australia had cash of AU$27m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was AU$38m. That means it had a cash runway of around 9 months as of December 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Importantly, if we extrapolate recent cash burn trends, the cash runway would be a lot longer. The image below shows how its cash balance has been changing over the last few years.
How Well Is Bubs Australia Growing?
At first glance it's a bit worrying to see that Bubs Australia actually boosted its cash burn by 11%, year on year. Also concerning, operating revenue was actually down by 22% in that time. Considering both these metrics, we're a little concerned about how the company is developing. 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.
How Hard Would It Be For Bubs Australia To Raise More Cash For Growth?
Since Bubs Australia can't yet boast improving growth metrics, the market will likely be considering how it can raise more cash if need be. Companies can raise capital through either debt or equity. 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 estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).