There’s no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
Given this risk, we thought we’d take a look at whether ECSC Group (LON:ECSC) shareholders should 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’. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
Does ECSC Group Have A Long Cash Runway?
You can calculate a company’s cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. When ECSC Group last reported its balance sheet in December 2019, it had zero debt and cash worth UK£351k. Importantly, its cash burn was UK£119k over the trailing twelve months. That means it had a cash runway of about 2.9 years as of December 2019. Arguably, that’s a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.
How Well Is ECSC Group Growing?
Given our focus on ECSC Group’s cash burn, we’re delighted to see that it reduced its cash burn by a nifty 87%. And it could also show revenue growth of 9.7% in the same period. It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.
How Easily Can ECSC Group Raise Cash?
We are certainly impressed with the progress ECSC Group has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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. By looking at a company’s cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year’s cash burn.
ECSC Group’s cash burn of UK£119k is about 1.8% of its UK£6.6m market capitalisation. So it could almost certainly just borrow a little to fund another year’s growth, or else easily raise the cash by issuing a few shares.
So, Should We Worry About ECSC Group’s Cash Burn?
As you can probably tell by now, we’re not too worried about ECSC Group’s cash burn. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. Its weak point is its revenue growth, but even that wasn’t too bad! Looking at all the measures in this article, together, we’re not worried about its rate of cash burn, which seems to be under control. Taking a deeper dive, we’ve spotted 5 warning signs for ECSC Group you should be aware of, and 3 of them are a bit unpleasant.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)
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