There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 LiveHire (ASX:LVH) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
How Long Is LiveHire’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. In December 2021, LiveHire had AU$11m in cash, and was debt-free. In the last year, its cash burn was AU$6.7m. That means it had a cash runway of around 20 months as of December 2021. Importantly, the one analyst we see covering the stock thinks that LiveHire will reach cashflow breakeven in around 21 months. That means it doesn’t have a great deal of breathing room, but it shouldn’t really need more cash, considering that cash burn should be continually reducing. You can see how its cash balance has changed over time in the image below.
How Well Is LiveHire Growing?
We reckon the fact that LiveHire managed to shrink its cash burn by 30% over the last year is rather encouraging. And arguably the operating revenue growth of 67% was even more impressive. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Hard Would It Be For LiveHire To Raise More Cash For Growth?
We are certainly impressed with the progress LiveHire has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster 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. 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 AU$95m, LiveHire’s AU$6.7m in cash burn equates to about 7.1% of its market value. 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.
Is LiveHire’s Cash Burn A Worry?
As you can probably tell by now, we’re not too worried about LiveHire’s cash burn. In particular, we think its revenue growth stands out as evidence that the company is well on top of its spending. And even though its cash runway wasn’t quite as impressive, it was still a positive. There’s no doubt that shareholders can take a lot of heart from the fact that at least one analyst is forecasting it will reach breakeven before too long. Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. An in-depth examination of risks revealed 3 warning signs for LiveHire that readers should think about before committing capital to this stock.
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.