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. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.
So should Yojee (ASX:YOJ) Are shareholders worried about its cash burn? 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”.
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When could Yojee run out of money?
A cash trail is defined as the length of time it would take a business to run out of cash if it continued to spend at its current rate of cash consumption. As of June 2022, Yojee had A$11 million in cash and no debt. Last year, its cash burn was A$7.5 million. So he had a cash trail of around 18 months from June 2022. Notably, however, the one analyst we see covering the stock thinks Yojee will break even (at a free cash flow level) before this date. In this case, he may never reach the end of his cash trail. Below you can see how its liquidity has changed over time.
How is Yojee’s cash burn changing over time?
While it’s great to see that Yojee has already started generating operating income, last year he only produced A$2.1m, so we don’t think he’s generating any significant income at this stage. Therefore, we believe it is a little early to focus on revenue growth, so we will limit ourselves to looking at how cash burn has evolved over time. With a cash burn rate up 38% over the past year, it looks like the company is increasing its investment in the business over time. This isn’t necessarily a bad thing, but investors should be aware that it will shorten the cash trail. While the past is always worth studying, it is the future that matters most. You might want to take a look at the company’s expected growth over the next few years.
Can Yojee raise more money easily?
Given its cash burn trajectory, Yojee shareholders may want to consider how easily it could raise more cash, despite its strong cash trail. Issuing new shares or going into debt are the most common ways for a listed company to raise more funds for its business. Many companies end up issuing new shares to fund their future growth. We can compare a company’s cash burn to its market capitalization to get an idea of how many new shares a company would need to issue to fund a year’s operations.
As its market capitalization is AU$74 million, Yojee’s cash burn of AU$7.5 million is about 10% of its market value. Given this situation, it’s fair to say that the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is Yojee’s money consumption a concern?
As you can probably tell by now, we’re not too worried about Yojee’s cash burn. In particular, we believe that its cash burn relative to its market capitalization is evidence that the company is in control of its spending. While its growing cash burn was not significant, the other factors mentioned in this article more than offset the weakness in this metric. It is clearly very positive to see that at least one analyst predicts that the company will soon break even. Looking at all the metrics in this article, together, we’re not worried about its cash burn rate; the company appears to be well above its medium-term spending needs. It is important for readers to be aware of the risks that can affect company operations, and we have selected 2 warning signs for Yojee investors need to know when investing in the stock.
Sure Yojee may not be the best stock to buy. So you might want to see this free collection of companies offering a high return on equity, or this list of stocks that insiders buy.
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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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