Just because a company isn’t making money doesn’t mean the stock will go down. For example, although software-as-a-service company Salesforce.com lost money for years as it grew recurring revenue, if you had held stock since 2005, you would have done very well. However, only a fool would ignore the risk of a loss-making company burning through its cash too quickly.
Given this risk, we thought we would examine whether Alset International (Catalyst: 40V) shareholders should be concerned about its consumption of cash. In this report, we will consider the company’s negative annual free cash flow, which we will now refer to as “cash burn”. The first step is to compare its cash consumption with its cash reserves, to give us its “cash trail”.
When could Alset International run out of money?
A company’s cash trail is calculated by dividing its cash hoard by its cash burn. As of June 2022, Alset International had S$46 million in cash and was debt free. Last year, its cash burn was S$10 million. This means he had a cash trail of around 4.4 years in June 2022. There is no doubt that this is a long and reassuring trail. The image below shows how his cash balance has changed over the past few years.
How is Alset International growing?
Notably, Alset International has actually increased its cash burn very hard and fast over the past year, by 131%, which signifies a significant investment in the business. And that’s all the more worrying given the fact that operating revenue actually fell 59% last year, as the company no doubt scrambles to change its fortunes. Considering these two factors together makes us nervous about the direction society seems to be heading. In reality, this article only makes a short study of the company’s growth data. You can find out how Alset International has grown its business over time by checking out this visualization of its revenue and profit history.
How difficult would it be for Alset International to raise more cash for growth?
Even though it looks like Alset International is growing its business well, we still like to consider how easily it could raise more money to accelerate growth. Companies can raise capital either through debt or equity. Typically, a company will sell new stock on its own to raise cash and drive growth. By comparing a company’s annual cash burn to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the company running for another year (at the same burn rate).
Alset International has a market capitalization of S$122 million and burned S$10 million last year, or 8.5% of the company’s market value. Since this is a rather small percentage, it would probably be very easy for the company to finance another year’s growth by issuing new shares to investors, or even taking out a loan.
So should we be worried about Alset International’s cash burn?
Even though its increasing consumption of cash makes us a bit nervous, we are bound to mention that we thought Alset International’s cash trail was relatively promising. Cash-burning businesses are always on the riskier side of things, but after considering all the factors discussed in this short article, we’re not too worried about its cash burn rate. On another note, Alset International has 4 warning signs (and 1 which does not suit us too much) we think you should know.
If you prefer to consult another company with better fundamentals, do not miss this free list of interesting companies, which have HIGH return on equity and low debt Where this list of actions that should all increase.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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