We believe that Acrux (ASX: ACR) needs to prudently drive the growth of the company
Even when a business loses money, it is possible for shareholders to make money if they buy a good business at the right price. For example, biotech and mineral exploration companies often lose money for years before they are successful with a new treatment or mineral discovery. But the harsh reality is that many, many loss-making companies burn all their money and go bankrupt.
In view of this risk, we thought to examine whether Acrux (ASX: ACR) shareholders should be concerned about its consumption of cash. For the purposes of this article, we’ll define cash consumption as the amount of cash the business spends each year to finance its growth (also known as negative free cash flow). The first step is to compare its cash consumption with its cash reserves, to give us its âcash flow trackâ.
Check out our latest analysis for Acrux
When could Acrux run out of money?
A company’s cash flow trail is the time it would take to deplete its cash reserves at its current rate of cash consumption. As of June 2021, Acrux had AU $ 15 million in cash and was debt free. Importantly, his cash consumption was AU $ 12 million in the past twelve months. Therefore, as of June 2021, he had around 16 months of cash flow. While this liquidity trail is not too much of a concern, sane holders would look into the distance and consider what would happen if the company ran out of cash. The image below shows how her cash balance has evolved over the past few years.
How does Acrux’s silver consumption change over time?
In our opinion, Acrux is not yet producing significant operating revenues, having only brought in A $ 1.3 million in the last twelve months. Therefore, for the purposes of this analysis, we will focus on monitoring cash consumption. Over the past year, its cash consumption has actually increased by 31%, which suggests that management is increasing its investments in future growth, but not too quickly. However, the true cash flow trail for the business will therefore be shorter than suggested above if expenses continue to increase. Acrux 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 expect to grow.
How easily can Acrux raise funds?
While Acrux has a strong cash trail, its cash-consuming trajectory may cause some shareholders to think about when the company might need to raise more cash. The issuance of new shares or indebtedness are the most common ways for a listed company to raise more money for its activity. Usually, a company will sell new stocks on its own to raise funds and stimulate growth. By comparing a company’s annual cash consumption to its total market capitalization, we can roughly estimate how many shares it would need to issue to keep the business running for another year (at the same burn rate).
Acrux has a market capitalization of AU $ 34 million and spent AU $ 12 million last year, or 34% of the company’s market value. That’s not insignificant, and if the company were to sell enough stock to fund another year’s growth at the current stock price, you’d likely see some pretty expensive dilution.
Is Acrux’s money consumption a concern?
Even though its consumption of cash relative to its market cap makes us a little nervous, we are forced to mention that we thought Acrux’s cash trail was relatively promising. In summary, we believe that Acrux’s cash consumption is a risk, based on the factors we have mentioned in this article. On another note, we conducted a thorough investigation of the company and identified 4 warning signs for Acrux (3 make us uncomfortable!) Which you should be aware of before investing here.
Sure, you might find a fantastic investment looking elsewhere. So take a look at this free list of companies that insiders buy, and this list of growth stocks (according to analysts’ forecasts)
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in the mentioned stocks.
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