Just because a business does not make any money, does not mean that the stock will go down. For example, AgJunction (TSE:AJX) shareholders have done very well over the last year, with the share price soaring by 191%. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky AgJunction's cash burn is. 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for AgJunction

Does AgJunction Have A Long Cash Runway?

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. As at December 2020, AgJunction had cash of US$6.8m and no debt. Importantly, its cash burn was US$10m over the trailing twelve months. So it had a cash runway of approximately 8 months from December 2020. 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.

How Well Is AgJunction Growing?

Notably, AgJunction actually ramped up its cash burn very hard and fast in the last year, by 177%, signifying heavy investment in the business. That's pretty alarming given that operating revenue dropped 58% over the last year, though the business is likely attempting a strategic pivot. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how AgJunction has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For AgJunction To Raise More Cash For Growth?

Given its revenue and free cash flow are both moving in the wrong direction, shareholders may well be wondering how easily AgJunction could raise cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

AgJunction's cash burn of US$10m is about 20% of its US$51m market capitalisation. 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 AgJunction's Cash Burn A Worry?

We must admit that we don't think AgJunction is in a very strong position, when it comes to its cash burn. While its cash burn relative to its market cap wasn't too bad, its increasing cash burn does leave us rather nervous. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for AgJunction (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course AgJunction may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks that insiders are buying.

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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