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There's no doubt that money can be made by owning shares of unprofitable businesses. For example, Live Verdure (ASX:LV1) shareholders have done very well over the last year, with the share price soaring by 348%. 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 its strong share price performance, we think it's worthwhile for Live Verdure shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
See our latest analysis for Live Verdure
When Might Live Verdure Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at December 2023, Live Verdure had cash of AU$1.3m and no debt. In the last year, its cash burn was AU$2.5m. That means it had a cash runway of around 6 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. You can see how its cash balance has changed over time in the image below.
How Well Is Live Verdure Growing?
It was fairly positive to see that Live Verdure reduced its cash burn by 29% during the last year. Unfortunately, however, operating revenue declined by 2.4% during the period. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Live Verdure is building its business over time.
How Hard Would It Be For Live Verdure To Raise More Cash For Growth?
Given Live Verdure's revenue is receding, there's a considerable chance it will eventually need to raise more money to spend on driving growth. Companies can raise capital through either debt or equity. 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.
Live Verdure's cash burn of AU$2.5m is about 3.1% of its AU$81m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.