There’s no doubt that money can be made by owning shares of unprofitable businesses. 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 history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we’d take a look at whether Dawson Geophysical (NASDAQ:DWSN) shareholders should be worried about its cash burn. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. The first step is to compare its cash burn with its cash reserves, to give us its ‘cash runway’.
See our latest analysis for Dawson Geophysical
How Long Is Dawson Geophysical’s Cash Runway?
A company’s cash runway is calculated by dividing its cash hoard by its cash burn. Dawson Geophysical has such a small amount of debt that we’ll set it aside, and focus on the US$22m in cash it held at September 2019. Looking at the last year, the company burnt through US$7.3m. So it had a cash runway of about 3.0 years from September 2019. There’s no doubt that this is a reassuringly long runway. You can see how its cash balance has changed over time in the image below.
How Well Is Dawson Geophysical Growing?
One thing for shareholders to keep front in mind is that Dawson Geophysical increased its cash burn by 318% in the last twelve months. As if that’s not bad enough, the operating revenue also dropped by 15%, making us very wary indeed. Considering these two factors together makes us nervous about the direction the company seems to be heading. Of course, we’ve only taken a quick look at the stock’s growth metrics, here. You can take a look at how Dawson Geophysical has developed its business over time by checking this visualization of its revenue and earnings history.
Can Dawson Geophysical Raise More Cash Easily?
Even though it seems like Dawson Geophysical is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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.
Dawson Geophysical’s cash burn of US$7.3m is about 13% of its US$55m market capitalisation. 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 Dawson Geophysical’s Cash Burn?
On this analysis of Dawson Geophysical’s cash burn, we think its cash runway was reassuring, while its increasing cash burn has us a bit worried. 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. While it’s important to consider hard data like the metrics discussed above, many investors would also be interested to note that Dawson Geophysical insiders have been trading shares in the company. Click here to find out if they have been buying or selling.
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)
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
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