Just because a business does not make any money, does not mean that the stock will go down. For example, DMG Blockchain Solutions (CVE:DMGI) shareholders have done very well over the last year, with the share price soaring by 709%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given its strong share price performance, we think it’s worthwhile for DMG Blockchain Solutions shareholders to consider whether its cash burn is concerning. 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’.
When Might DMG Blockchain Solutions 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. DMG Blockchain Solutions has such a small amount of debt that we’ll set it aside, and focus on the CA$42m in cash it held at March 2021. In the last year, its cash burn was CA$32m. Therefore, from March 2021 it had roughly 16 months of cash runway. While that cash runway isn’t too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.
Is DMG Blockchain Solutions’ Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because DMG Blockchain Solutions actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company’s operating revenue moved in the wrong direction over the last twelve months, declining by 21%. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how DMG Blockchain Solutions has developed its business over time by checking this visualization of its revenue and earnings history.
Can DMG Blockchain Solutions Raise More Cash Easily?
Since its revenue growth is moving in the wrong direction, DMG Blockchain Solutions shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
DMG Blockchain Solutions has a market capitalisation of CA$154m and burnt through CA$32m last year, which is 21% of the company’s market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
Is DMG Blockchain Solutions’ Cash Burn A Worry?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought DMG Blockchain Solutions’ 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. Taking a deeper dive, we’ve spotted 3 warning signs for DMG Blockchain Solutions you should be aware of, and 1 of them makes us a bit uncomfortable.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
This article by Simply Wall St is general in nature. 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.
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