We can readily understand why investors are attracted to unprofitable companies. Indeed, ClearVue Technologies (ASX:CPV) stock is up 139% in the last year, providing strong gains for shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given its strong share price performance, we think it's worthwhile for ClearVue Technologies shareholders to consider whether its cash burn is concerning. 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
View our latest analysis for ClearVue Technologies
When Might ClearVue Technologies Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When ClearVue Technologies last reported its balance sheet in June 2023, it had zero debt and cash worth AU$5.2m. Importantly, its cash burn was AU$6.7m over the trailing twelve months. That means it had a cash runway of around 9 months as of June 2023. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. The image below shows how its cash balance has been changing over the last few years.
How Is ClearVue Technologies' Cash Burn Changing Over Time?
In our view, ClearVue Technologies doesn't yet produce significant amounts of operating revenue, since it reported just AU$63k in the last twelve months. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. Over the last year its cash burn actually increased by 49%, which suggests that management are increasing investment in future growth, but not too quickly. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. ClearVue Technologies 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.
Can ClearVue Technologies Raise More Cash Easily?
Given its cash burn trajectory, ClearVue Technologies shareholders should already be thinking about how easy it might be for it to raise further cash in the future. Companies can raise capital through either debt or equity. Many companies end up issuing new shares to fund future growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).