Companies Like RAS Technology Holdings (ASX:RTH) Can Afford To Invest In Growth

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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So should RAS Technology Holdings (ASX:RTH) shareholders be worried about its 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.

View our latest analysis for RAS Technology Holdings

How Long Is RAS Technology Holdings' Cash Runway?

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. In June 2023, RAS Technology Holdings had AU$8.7m in cash, and was debt-free. Looking at the last year, the company burnt through AU$1.9m. That means it had a cash runway of about 4.5 years as of June 2023. 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.

How Well Is RAS Technology Holdings Growing?

It was fairly positive to see that RAS Technology Holdings reduced its cash burn by 49% during the last year. And considering that its operating revenue gained 41% during that period, that's great to see. We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how RAS Technology Holdings is growing revenue over time by checking this visualization of past revenue growth.

How Hard Would It Be For RAS Technology Holdings To Raise More Cash For Growth?

We are certainly impressed with the progress RAS Technology Holdings has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. 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 and drive 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 AU$37m, RAS Technology Holdings' AU$1.9m in cash burn equates to about 5.2% of its market value. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

How Risky Is RAS Technology Holdings' Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way RAS Technology Holdings is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. But it's fair to say that its cash burn reduction was also very reassuring. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, RAS Technology Holdings has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

Of course RAS Technology Holdings 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.

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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.