Is BrainChip Holdings (ASX:BRN) In A Good Position To Deliver On Growth Plans?
We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made...
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editorial-team@simplywallst.com (Simply Wall St)
Mon, Jun 10, 2024 3 min read
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We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether
BrainChip Holdings (
ASX:BRN) shareholders should be worried about its cash burn. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Check out our latest analysis for BrainChip Holdings
Does BrainChip Holdings Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. When BrainChip Holdings last reported its December 2023 balance sheet in February 2024, it had zero debt and cash worth US$14m. Looking at the last year, the company burnt through US$18m. So it had a cash runway of approximately 10 months from December 2023. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. You can see how its cash balance has changed over time in the image below.
debt-equity-history-analysis
How Is BrainChip Holdings' Cash Burn Changing Over Time?
Whilst it's great to see that BrainChip Holdings has already begun generating revenue from operations, last year it only produced US$232k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 28% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. BrainChip Holdings makes 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 Hard Would It Be For BrainChip Holdings To Raise More Cash For Growth?
Since its cash burn is moving in the wrong direction, BrainChip Holdings 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. Many companies end up issuing new shares to fund future 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).
BrainChip Holdings' cash burn of US$18m is about 6.4% of its US$275m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About BrainChip Holdings' Cash Burn?
On this analysis of BrainChip Holdings' cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. 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. Separately, we looked at different risks affecting the company and spotted
4 warning signs for BrainChip Holdings (of which 3 shouldn't be ignored!) you should know about.
