Yahoo Finance Here's Why We're Watching C4X Discovery Holdings' (LON:C4XD) Cash Burn Situation
We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for C4X Discovery Holdings (LON:C4XD) 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 C4X Discovery Holdings
How Long Is C4X Discovery Holdings' Cash Runway?
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. As at July 2023, C4X Discovery Holdings had cash of UK£4.2m and no debt. Looking at the last year, the company burnt through UK£6.0m. Therefore, from July 2023 it had roughly 8 months of cash runway. 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. Depicted below, you can see how its cash holdings have changed over time.
How Well Is C4X Discovery Holdings Growing?
It was fairly positive to see that C4X Discovery Holdings reduced its cash burn by 50% during the last year. But the revenue dip of 37% in the same period was a bit concerning. Considering both these factors, we're not particularly excited by its growth profile. 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 Easily Can C4X Discovery Holdings Raise Cash?
Since C4X Discovery Holdings revenue has been falling, the market will likely be considering how it can raise more cash if need be. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.
Since it has a market capitalisation of UK£32m, C4X Discovery Holdings' UK£6.0m in cash burn equates to about 19% of its market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.
How Risky Is C4X Discovery Holdings' Cash Burn Situation?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought C4X Discovery Holdings' cash burn reduction was relatively promising. Summing up, we think the C4X Discovery Holdings' cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 5 warning signs for C4X Discovery Holdings (3 shouldn't be ignored!) that you should be aware of before investing here.
Of course C4X Discovery Holdings 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.
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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.
