Just because a business does not make any money, does not mean that the stock will go down. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Westell Technologies (NASDAQ:WSTL) shareholders is whether they should be concerned by its rate of 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. First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.
When Might Westell Technologies Run Out Of Money?
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 Westell Technologies last reported its balance sheet in December 2019, it had zero debt and cash worth US$22m. Looking at the last year, the company burnt through US$4.7m. That means it had a cash runway of about 4.7 years as of December 2019. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.
Is Westell Technologies’s Revenue Growing?
We’re hesitant to extrapolate on the recent trend to assess its cash burn, because Westell Technologies actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company’s operating revenue moved in the wrong direction over the last twelve months, declining by 26%. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Westell Technologies has developed its business over time by checking this visualization of its revenue and earnings history.
How Hard Would It Be For Westell Technologies To Raise More Cash For Growth?
Since its revenue growth is moving in the wrong direction, Westell Technologies 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. 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).
Since it has a market capitalisation of US$12m, Westell Technologies’s US$4.7m in cash burn equates to about 38% of its market value. That’s fairly notable cash burn, so if the company had to sell shares to cover the cost of another year’s operations, shareholders would suffer some costly dilution.
So, Should We Worry About Westell Technologies’s Cash Burn?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Westell Technologies’s cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we’re not too worried about its rate of cash burn. Taking an in-depth view of risks, we’ve identified 3 warning signs for Westell Technologies that you should be aware of before investing.
Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, and this list of stocks growth stocks (according to analyst forecasts)
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