Electro Optic Systems Holdings (ASX:EOS) Is In A Strong Position To Grow Its Business

By
Simply Wall St
Published
September 27, 2021
ASX:EOS
Source: Shutterstock

We can readily understand why investors are attracted to unprofitable companies. 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 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 Electro Optic Systems Holdings (ASX:EOS) 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). Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Electro Optic Systems Holdings

When Might Electro Optic Systems Holdings Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, Electro Optic Systems Holdings had cash of AU$51m and no debt. In the last year, its cash burn was AU$64m. That means it had a cash runway of around 10 months as of June 2021. Importantly, though, analysts think that Electro Optic Systems Holdings will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:EOS Debt to Equity History September 27th 2021

How Well Is Electro Optic Systems Holdings Growing?

It was fairly positive to see that Electro Optic Systems Holdings reduced its cash burn by 45% during the last year. Revenue also improved during the period, increasing by 10%. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Electro Optic Systems Holdings To Raise More Cash For Growth?

While Electro Optic Systems Holdings seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Electro Optic Systems Holdings has a market capitalisation of AU$563m and burnt through AU$64m last year, which is 11% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

Is Electro Optic Systems Holdings' Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Electro Optic Systems Holdings is burning through its cash. In particular, we think its cash burn reduction stands out as evidence that the company is well on top of its spending. Although its cash runway does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. There's no doubt that shareholders can take a lot of heart from the fact that analysts are forecasting it will reach breakeven before too long. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Electro Optic Systems Holdings that potential shareholders should take into account before putting money into a stock.

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)

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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Simply Wall St

Simply Wall St is focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of data scientists and multiple equity analysts with over two decades worth of financial markets experience between them.