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 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.
Given this risk, we thought we’d take a look at whether Nordic Aqua Partners (OB:NOAP) shareholders should be worried about its 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’.
View our latest analysis for Nordic Aqua Partners
When Might Nordic Aqua Partners Run Out Of Money?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In December 2021, Nordic Aqua Partners had kr.277m in cash, and was debt-free. In the last year, its cash burn was kr.130m. So it had a cash runway of about 2.1 years from December 2021. Arguably, that’s a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Is Nordic Aqua Partners’ Cash Burn Changing Over Time?
Nordic Aqua Partners didn’t record any revenue over the last year, indicating that it’s an early stage company still developing its business. So while we can’t look to sales to understand growth, we can look at how the cash burn is changing to understand how expenditure is trending over time. The skyrocketing cash burn up 187% year on year certainly tests our nerves. It’s fair to say that sort of rate of increase cannot be maintained for very long, without putting pressure on the balance sheet. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analysts forecasts for the company.
How Hard Would It Be For Nordic Aqua Partners To Raise More Cash For Growth?
Given its cash burn trajectory, Nordic Aqua Partners shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. We can compare a company’s cash burn to its market capitalization 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 capitalization of kr.524m, Nordic Aqua Partners’ kr.130m in cash burn equates to about 25% of its market value. That’s fairly notable cash burn, so if the company had to sell shares to cover the cost of another year’s operations, shareholders would suffer some costly dilution.
How Risky Is Nordic Aqua Partners’ Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Nordic Aqua Partners’ 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. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Nordic Aqua Partners (of which 1 doesn’t sit too well with us!) you should know about.
Of course Nordic Aqua Partners 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.