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, even though Amazon.com incurred losses for many years after listing, if you had bought the stock and held it since 1999, it would be a fortune. But the harsh reality is that many companies that incur losses burn all their money and go bankrupt.
Given this risk, we thought we’d take a look at whether Nordic Aqua Partners (OB: NOAP) Shareholders should worry about burning cash. For the purpose of this article, we will define cash burn as the amount of cash a company spends each year to finance its growth (also called negative free cash flow). The first step is to compare its cash burn with its cash reserves, to give us a ‘liquidity path’.
View our latest analysis of Nordic Aqua’s partners
When will 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 spends that cash. In December 2021, Nordic Aqua Partners had SEK 277 million, and was debt-free. Last year, her cash burn was 130 million Swedish kronor. So it had a cash runway of about 2.1 years as of December 2021. Arguably, it’s a wise and reasonable runway length. You can see how her cash balance has changed over time in the image below.
How does Nordic Aqua Partners’ cash burn change over time?
Nordic Aqua Partners has reported no revenue over the past year, indicating that it is a very early stage company still developing its business. So, while we can’t look to sales to understand growth, we can look at how cash burning has changed to understand how spending is trending over time. The money burns surging 187% year over year definitely test our nerves. It is fair to say that this kind of rate of increase cannot be maintained for a long time, without putting pressure on the balance sheet. Obviously, the deciding factor is whether the company will grow its business in the future. For this reason, it makes a lot of sense to take a look at our analysts’ forecasts for the company.
How difficult is it for Nordic Aqua partners to raise more money for growth?
Given its cash burn trajectory, Nordic Aqua Partners shareholders may want to consider how easy it would be to raise more cash, despite its strong cash runway. Generally, a listed company can raise new cash by issuing shares or borrowing. Generally, the company sells new shares in its own right to increase liquidity and drive growth. We can compare a company’s cash burn to its market value to see how many new shares the company will have to issue to fund one year’s operations.
With a market value of SEK 524 million, Nordic Aqua Partners’ cash burn of SEK 130 million is equivalent to about 25% of its market value. That’s a fairly noticeable 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 dangerous is a cash-burning situation for Nordic Aqua Partners?
Although the increased cash burn makes us feel a little nervous, we have to point out that we thought Nordic Aqua Partners’ cash runway was relatively promising. While we don’t think it has a problem burning cash, our analysis in this article suggests that shareholders should think carefully about the potential cost of raising more money in the future. Separately, we looked at and monitored various risks affecting the company Two warning signs for Nordic Aqua Partners (1 of which doesn’t fit us well!) You should know about it.
naturally Nordic Aqua Partners may not be the best stock to buy. So you might like to see this Free A group of companies with a high return on equity, or a list of shares that insiders buy.
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This article by Simply Wall St is general in nature. We provide comments based only on historical data and analyst expectations 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, nor does it take into account your objectives or financial situation. We aim to provide you with focused, long-term analysis driven by essential data. Note that our analysis may not include the company’s most recent price-sensitive ads or quality materials. Wall Street simply has no position in any of the stocks mentioned.