Can RewardStream Solutions (CVE:REW.H) Afford To Invest In Growth?

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether RewardStream Solutions (CVE:REW.H) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for RewardStream Solutions

Does RewardStream Solutions Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. When RewardStream Solutions last reported its balance sheet in December 2019, it had zero debt and cash worth CA$1.4k. Looking at the last year, the company burnt through CA$516k. So it seems to us it had a cash runway of less than two months from December 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! Depicted below, you can see how its cash holdings have changed over time.

How Is RewardStream Solutions's Cash Burn Changing Over Time?

Because RewardStream Solutions isn't currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. We'd venture that the 71% reduction in cash burn over the last year shows that management are, at least, mindful of its ongoing need for cash. RewardStream Solutions 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.

Can RewardStream Solutions Raise More Cash Easily?

There's no doubt RewardStream Solutions's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash to drive 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).

RewardStream Solutions's cash burn of CA$516k is about 59% of its CA$874k market capitalisation. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

Is RewardStream Solutions's Cash Burn A Worry?

There are no prizes for guessing that we think RewardStream Solutions's cash burn is a bit of a worry. Take, for example, its cash runway, which suggests the company may have difficulty funding itself, in the future. But the silver lining was its cash burn reduction, which was encouraging. After considering the data discussed in this article, we don't have a lot of confidence that its cash burn rate is prudent, as it seems like it might need more cash soon. Taking a deeper dive, we've spotted 5 warning signs for RewardStream Solutions you should be aware of, and 2 of them are potentially serious.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

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