We think Adveritas (ASX:AV1) needs to drive its business growth cautiously

We can easily understand why investors are attracted to unprofitable companies. For example, although Amazon.com posted losses for many years after it listed, if you had bought and held the stock since 1999, you would have made a fortune. That said, unprofitable businesses are risky because they could potentially burn all their money and get into trouble.

So should Advertising (ASX: AV1) are shareholders worried about its consumption of cash? For the purposes of this article, we will define cash burn as the amount of money the business spends each year to finance its growth (also known as negative free cash flow). First, we will determine its cash trail by comparing its cash consumption with its cash reserves.

See our latest analysis for Adveritas

Does Adveritas have a long cash trail?

A company’s cash trail is calculated by dividing its cash hoard by its cash burn. As of June 2020, Adveritas had cash of A$8.4 million and no debt. Looking at last year, the company spent A$7.2 million. Therefore, as of June 2020, he had approximately 14 months of cash. While this cash trail isn’t too much of a concern, sane holders would look away and consider what would happen if the company ran out of cash. You can see how his cash balance has changed over time in the image below.

How is Adveritas’ cash burn changing over time?

While it’s great to see that Adveritas has already started generating operating revenue, last year it only produced AUD$1.2m, so we don’t think it’s generating significant revenue at this stage. Therefore, for the purposes of this analysis, we will focus on how cash burn is tracked. With a cash burn rate up 4.1% over the past year, it looks like the company is increasing its investment in the business over time. However, the company’s true cash trail will therefore be shorter than suggested above, if expenses continue to rise. Admittedly, we are a bit cautious of Adveritas due to its lack of meaningful operating revenue. We prefer most stocks over this list of stocks that analysts expect to see grow.

How difficult would it be for Adveritas to raise more cash for growth?

As its cash burn is increasing (albeit slightly), Adveritas shareholders should always be aware of the possibility that it may need more cash in the future. Companies can raise capital either through debt or equity. One of the main advantages of publicly traded companies is that they can sell shares to investors to raise funds and finance their 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.

With a market capitalization of A$64 million, Adveritas’ cash burn of A$7.2 million equates to approximately 11% of its market value. As a result, we risk the company being able to raise more cash for growth without too much trouble, but at the cost of some dilution.

So should we be worried about Adveritas’ cash burn?

Even though its growing cash burn makes us a bit nervous, we are bound to mention that we think Adveritas’ cash burn relative to its market capitalization is relatively promising. While we don’t think it has a problem with its cash burn, the analysis we’ve done in this article suggests that shareholders should think carefully about the potential cost of raising more money in the future. On another note, Adveritas has 5 warning signs (and 3 potentially serious) we think you should know.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analyst forecasts)

This Simply Wall St article is general in nature. 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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