There’s no doubt that money can be made by owning shares of unprofitable businesses. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
So, the natural question for Transcendence Technologies (ASX:TTL) 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. Let’s start with an examination of the business’s cash, relative to its cash burn.
Does Transcendence Technologies 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. In June 2019, Transcendence Technologies had AU$1.2m in cash, and was debt-free. In the last year, its cash burn was AU$454k. That means it had a cash runway of about 2.6 years as of June 2019. Arguably, that’s a prudent and sensible length of runway to have. You can see how its cash balance has changed over time in the image below.
How Is Transcendence Technologies’s Cash Burn Changing Over Time?
Because Transcendence Technologies 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. While it hardly paints a picture of imminent growth, the fact that it has reduced its cash burn by 32% over the last year suggests some degree of prudence. Admittedly, we’re a bit cautious of Transcendence Technologies due to its lack of significant operating revenues. So we’d generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Hard Would It Be For Transcendence Technologies To Raise More Cash For Growth?
While Transcendence Technologies 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. Companies can raise capital through either debt or equity. 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.
Transcendence Technologies has a market capitalisation of AU$1.4m and burnt through AU$454k last year, which is 33% of the company’s market value. That’s not insignificant, and if the company had to sell enough shares to fund another year’s growth at the current share price, you’d likely witness fairly costly dilution.
Is Transcendence Technologies’s Cash Burn A Worry?
Even though its cash burn relative to its market cap makes us a little nervous, we are compelled to mention that we thought Transcendence Technologies’s cash runway was relatively promising. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don’t think they should be worried. When you don’t have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: Transcendence Technologies insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.
Of course Transcendence Technologies 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.
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.