We can easily understand why investors are attracted to unprofitable companies. For example, although Salesforce.com’s software-as-a-service business lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So, the natural question for Chronos Group (TSE:CRON) shareholders is whether they should be concerned by its rate of 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). The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
See our latest analysis for the Cronos Group
When Might Cronos Group Run Out Of Money?
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. When Cronos Group last reported its balance sheet in September 2022, it had zero debt and cash worth US$889m. In the last year, its cash burn was US$105m. Therefore, from September 2022 it had 8.4 years of cash runway. Notably, however, analysts think that Cronos Group will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has changed over the last few years.
How Well Is Cronos Group Growing?
We recognize the fact that Cronos Group managed to shrink its cash burn by 41% over the last year is rather encouraging. On top of that, operating revenue was up 44%, making for a heartening combination. We think it is growing rather well, upon reflection. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Cronos Group To Raise More Cash For Growth?
We are certainly impressed with the progress Cronos Group 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company’s annual cash burn to its total market capitalisation, we can roughly estimate how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalization of US$927m, Cronos Group’s US$105m in cash burn equates to about 11% of its market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, even if at the cost of some dilution.
So, Should We Worry About Cronos Group’s Cash Burn?
As you can probably tell by now, we’re not too worried about Cronos Group’s cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its cash burn relative to its market cap wasn’t quite as good, but it was still rather encouraging! One real positive is that analysts are forecasting that the company will reach breakeven. After taking into account the various metrics mentioned in this report, we’re pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the Cronos Group CEO receives in total remuneration.
Of course Cronos Group may not be the best stock to buy. So you may wish to see this free a collection of companies boasting high returns on equity, or this list of stocks that insiders are buying.
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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.
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