Even when a business is losing money, it’s possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you’d have done very well indeed. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether Globalive Technology (CVE:LIVE) shareholders should be worried about its cash burn. In this report, we will consider the company’s annual negative free cash flow, henceforth referring to it as the ‘cash burn’. We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for Globalive Technology
Does Globalive Technology Have A Long Cash Runway?
A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. In September 2019, Globalive Technology had CA$21m in cash, and was debt-free. In the last year, its cash burn was CA$8.6m. That means it had a cash runway of about 2.5 years as of September 2019. That’s decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.
How Is Globalive Technology’s Cash Burn Changing Over Time?
In our view, Globalive Technology doesn’t yet produce significant amounts of operating revenue, since it reported just CA$376k in the last twelve months. Therefore, for the purposes of this analysis we’ll focus on how the cash burn is tracking. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. Globalive Technology makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can Globalive Technology Raise Cash?
Since its cash burn is increasing (albeit only slightly), Globalive Technology shareholders should still be mindful of the possibility it will require more cash in the future. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to 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.
Globalive Technology has a market capitalisation of CA$9.1m and burnt through CA$8.6m last year, which is 95% of the company’s market value. Given just how high that expenditure is, relative to the company’s market value, we think there’s an elevated risk of funding distress, and we would be very nervous about holding the stock.
Is Globalive Technology’s Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Globalive Technology’s cash runway was relatively promising. Even though we don’t think it has a problem with its cash burn, the analysis we’ve done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. On another note, Globalive Technology has 4 warning signs (and 3 which shouldn’t be ignored) we think you should know about.
Of course Globalive Technology may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.
If you spot an error that warrants correction, please contact the editor at [email protected]. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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