We can easily understand why investors are attracted to unprofitable businesses. For example, although Amazon.com suffered losses for many years after listing, if you had bought and owned the shares since 1999, you would have made a fortune. That said, unprofitable businesses are risky because they could potentially burn all their money and become distressed.
Given this risk, we thought we would examine whether Pearl Global (ASX: PG1) shareholders should be concerned about its consumption of cash. In this article, we define cash consumption as its annual (negative) free cash flow, which is the amount of money a business spends each year to fund its growth. Let’s start with an examination of the company’s cash flow, compared to its cash consumption.
Check out our latest analysis for Pearl Global
How long does the Pearl Global Cash track last?
A business’s cash flow is the time it would take to use its cash reserves at its current consumption rate. Pearl Global has such a low debt that we will set it aside and focus on the AU $ 1.2 million in cash it held in December 2019. It is important to note that its cash was 6.3 M $ AU in the past twelve months. So there was a cash trail of around 2 months from December 2019. It is extremely surprising to us that the company allowed its cash trail to be so short! Below you can see how his cash holdings have changed over time.
How does Pearl Global’s cash flow evolve over time?
While it’s great to see that Pearl Global has already started to generate operating revenue, last year it only produced 1.2 million Australian dollars, so we don’t think it is generating significant revenue at this point. As a result, we think it is a bit early to focus on revenue growth, so we will limit ourselves to looking at how cash consumption evolves over time. With a liquidity rate up 13% over the past year, it appears that the business is gradually increasing its investments in the business over time. This is not necessarily a bad thing, but investors should be aware that this will shorten the cash trail. Certainly, we are a little cautious of Pearl Global due to its lack of significant operating revenues. We prefer most of the stocks on this stock list that analysts plan to grow.
Can Pearl Global easily raise more cash?
Given that its cash consumption is moving in the wrong direction, Pearl Global shareholders may wish to anticipate when the company may need to raise more cash. The issuance of new shares or debt are the most common means for a listed company to raise more money for its activity. One of the main advantages of listed companies is that they can sell stocks to investors in order to raise funds to finance their growth. We can compare a company’s cash consumption to its market capitalization to get an idea of the number of new shares that a company should issue to finance operations in a year.
Pearl Global has a market capitalization of AU $ 23 million and burned AU $ 6.3 million last year, which represents 28% of the market value of the business. This represents a fairly significant loss of cash. If the company were to sell shares to cover the cost of operations in another year, the shareholders would face costly dilution.
So should we be worried about Pearl Global’s cash flow?
There is no price to guess that we think Pearl Global’s cash consumption is a bit worrisome. Take, for example, its cash trail, which suggests that the company may have difficulty funding itself in the future. And while we accept that his growing use of cash isn’t as worrisome as his cash trail, it was always a real drawback; like all the factors that we have examined in this article. Once we consider together the parameters mentioned in this article, we are left with very little confidence in the ability of the company to manage its consumption of cash, and we think that it will probably need more money. On another note, we conducted a thorough investigation of the company and identified 7 warning signs for Pearl Global (3 are potentially serious!) That you should know before investing here.
Of course, you could find a fantastic investment by looking elsewhere. So take a look at that free list of interesting companies, and this list of stocks growth stocks (according to analysts’ forecasts)
If you spot an error that merits correction, please contact the publisher at [email protected] This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell securities and does not take into account your objectives or your financial situation. Simply Wall St has no position in the stocks mentioned.
Our goal is to provide you with long-term targeted research analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive corporate announcements or qualitative material. Thanks for the reading.
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