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Even when a company loses money, it is possible for shareholders to make money if they buy a good company at the right price. For example, Royal helium Shareholders of (CVE: RHC) have performed very well over the past year, with the share price climbing 1,300%. That said, unprofitable businesses are risky because they could potentially burn all their money and become in distress.
Given the strong performance of its share price, we believe it is worthwhile for Royal Helium shareholders to determine whether its cash consumption is of concern. For the purposes of this article, cash consumption is the annual rate at which an unprofitable business spends cash to finance its growth; its negative free cash flow. The first step is to compare its cash consumption with its cash reserves, to give us its “cash flow track”.
Discover our latest analyzes for Royal Helium
When could Royal Helium run out of money?
A company’s cash flow track is calculated by dividing its cash reserve by its cash consumption. As of December 2020, Royal Helium had C $ 5.9 million in cash and was debt free. Importantly, its cash consumption amounted to C $ 1.2 million over the past twelve months. Therefore, as of December 2020, he had 4.9 years of cash flow. Notably, however, the only analyst we see covering the stock believes Royal Helium will break even (at a free cash flow level) before then. In this case, he may never reach the end of his cash track. You can see how his cash balance has changed over time in the image below.
How does Royal Helium’s silver consumption change over time?
Royal Helium has not recorded any revenue in the past year, indicating that it is a start-up company that continues to grow its business. So while we can’t look to sales to understand growth, we can look at how cash consumption changes to understand how spending changes over time. Over the past twelve months, its cash consumption has actually increased by 67%. While this increase in spending is undoubtedly intended to drive growth, if the trend continues, the company’s cash flow will shrink very quickly. Royal Helium is making us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts plan to grow.
How easily can Royal Helium raise liquidity?
While Royal Helium has a strong cash trail, its cash-consuming trajectory may cause some shareholders to think ahead when the company may need to raise more cash. The issuance of new shares or indebtedness are the most common ways for a listed company to raise more funds for its activity. One of the main advantages of publicly traded companies is that they can sell stocks to investors to raise cash and finance growth. We can compare a company’s cash consumption to its market capitalization to get an idea of how many new shares a company would need to issue to fund its operations for a year.
As its market capitalization is C $ 44 million, Royal Helium’s consumption of C $ 1.2 million represents approximately 2.7% of its market value. So he could almost certainly borrow a little to fund another year’s growth, or he could easily increase liquidity by issuing a few shares.
So, should we be worried about Royal Helium’s cash consumption?
It may already be obvious to you that we are relatively comfortable with the way Royal Helium burns its money. For example, we think his cash flow trail suggests the business is on the right track. While its growing consumption of cash has not been great, the other factors mentioned in this article more than make up for the weakness of this metric. A real bright spot is that at least one analyst predicts the business will break even. Looking at all of the metrics in this article, together, we’re not concerned about its rate of cash consumption; the business appears to be well above its medium-term spending needs. By diving deeper, we spotted 5 warning signs for Royal Helium you need to be aware of this, and 3 of them make us uncomfortable.
If you’d rather discover another business with better fundamentals, don’t miss this free list of interesting companies, which have high return on equity and low leverage or this list of stocks that are all expected to grow.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
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