We’re A Little Worried About NexOptic Technology’s (CVE:NXO) Cash Burn Rate

We can readily understand why investors are attracted to unprofitable companies. 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. 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, the natural question for NexOptic Technology (CVE:NXO) shareholders is whether they should be concerned by its rate of 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). First, we’ll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for NexOptic Technology

When Might NexOptic Technology Run Out Of Money?

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. NexOptic Technology has such a small amount of debt that we’ll set it aside, and focus on the CA$1.3m in cash it held at September 2019. Looking at the last year, the company burnt through CA$6.0m. Therefore, from September 2019 it had roughly 3 months of cash runway. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. You can see how its cash balance has changed over time in the image below.

TSXV:NXO Historical Debt, January 14th 2020
TSXV:NXO Historical Debt, January 14th 2020

How Is NexOptic Technology’s Cash Burn Changing Over Time?

Because NexOptic Technology isn’t currently generating revenue, we consider it an early-stage business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. As it happens, the company’s cash burn reduced by 3.1% over the last year, which suggests that management may be mindful of the risks of their depleting cash reserves. NexOptic Technology makes us a little nervous due to its lack of substantial operating revenue. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Easily Can NexOptic Technology Raise Cash?

While NexOptic Technology is showing a solid reduction in its cash burn, it’s still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Since it has a market capitalisation of CA$44m, NexOptic Technology’s CA$6.0m in cash burn equates to about 14% of its market value. Given that situation, it’s fair to say the company wouldn’t have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About NexOptic Technology’s Cash Burn?

On this analysis of NexOptic Technology’s cash burn, we think its cash burn relative to its market cap was reassuring, while its cash runway has us a bit worried. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable. For us, it’s always important to consider risks around cash burn rates. But investors should look at a whole range of factors when researching a new stock. For example, it could be interesting to see how much the NexOptic Technology CEO receives in total remuneration.

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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