We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
So should I.D. Systems (NASDAQ:IDSY) shareholders be worried about its cash burn? 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). Let’s start with an examination of the business’s cash, relative to its cash burn.
Does I.D. Systems 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. As at June 2019, I.D. Systems had cash of US$8.1m and no debt. Importantly, its cash burn was US$1.2m over the trailing twelve months. That means it had a cash runway of about 6.9 years as of June 2019. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.
How Well Is I.D. Systems Growing?
Happily, I.D. Systems is travelling in the right direction when it comes to its cash burn, which is down 78% over the last year. And while hardly exciting, it was still good to see revenue growth of 8.6% during that time. We think it is growing rather well, upon reflection. While the past is always worth studying, it is the future that matters most of all. So you might want to take a peek at how much the company is expected to grow in the next few years.
How Hard Would It Be For I.D. Systems To Raise More Cash For Growth?
We are certainly impressed with the progress I.D. Systems 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. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
I.D. Systems has a market capitalisation of US$105m and burnt through US$1.2m last year, which is 1.1% of the company’s market value. 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.
How Risky Is I.D. Systems’s Cash Burn Situation?
As you can probably tell by now, we’re not too worried about I.D. Systems’s cash burn. For example, we think its cash runway suggests that the company is on a good path. Its weak point is its revenue growth, but even that wasn’t too bad! Taking all the factors in this report into account, we’re not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that I.D. Systems insiders have been trading shares in the company. Click here to find out if they have been buying or selling.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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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. Thank you for reading.