Companies Like Murray Cod Australia (ASX:MCA) Are In A Position To Invest In Growth

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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Murray Cod Australia (ASX:MCA) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for Murray Cod Australia

When Might Murray Cod Australia Run Out Of Money?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. Murray Cod Australia has such a small amount of debt that we'll set it aside, and focus on the AU$27m in cash it held at June 2022. Importantly, its cash burn was AU$13m over the trailing twelve months. Therefore, from June 2022 it had 2.2 years of cash runway. Importantly, the one analyst we see covering the stock thinks that Murray Cod Australia will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.

How Well Is Murray Cod Australia Growing?

Notably, Murray Cod Australia actually ramped up its cash burn very hard and fast in the last year, by 183%, signifying heavy investment in the business. But the silver lining is that operating revenue increased by 31% in that time. Taken together, we think these growth metrics are a little worrying. 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 Easily Can Murray Cod Australia Raise Cash?

Even though it seems like Murray Cod Australia is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Murray Cod Australia's cash burn of AU$13m is about 8.6% of its AU$145m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.

Is Murray Cod Australia's Cash Burn A Worry?

On this analysis of Murray Cod Australia's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. One real positive is that at least one analyst is forecasting that the company will reach breakeven. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Murray Cod Australia's situation. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Murray Cod Australia that investors should know when investing in the 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)

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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.