Yahoo Finance Here's Why We're Watching Acacia Research's (NASDAQ:ACTG) Cash Burn Situation
Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So should Acacia Research (NASDAQ:ACTG) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
Check out our latest analysis for Acacia Research
When Might Acacia Research Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. In December 2019, Acacia Research had US$168m in cash, and was debt-free. Looking at the last year, the company burnt through US$57m. So it had a cash runway of about 3.0 years from December 2019. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.
Is Acacia Research's Revenue Growing?
Given that Acacia Research actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 91%, which is rather concerning. In reality, this article only makes a short study of the company's growth data. You can take a look at how Acacia Research has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Acacia Research Raise Cash?
Since its revenue growth is moving in the wrong direction, Acacia Research shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund 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.
Since it has a market capitalisation of US$116m, Acacia Research's US$57m in cash burn equates to about 49% of its market value. 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).
How Risky Is Acacia Research's Cash Burn Situation?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Acacia Research's cash runway was relatively promising. 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. An in-depth examination of risks revealed 2 warning signs for Acacia Research that readers should think about before committing capital to this stock.
Of course Acacia Research 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.
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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