We're Interested To See How Mach7 Technologies (ASX:M7T) Uses Its Cash Hoard To Grow

We can readily understand why investors are attracted to unprofitable companies. 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 the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

Given this risk, we thought we'd take a look at whether Mach7 Technologies (ASX:M7T) shareholders should 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Mach7 Technologies

When Might Mach7 Technologies 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. As at December 2022, Mach7 Technologies had cash of AU$21m and no debt. Importantly, its cash burn was AU$434k over the trailing twelve months. That means it had a cash runway of very many years as of December 2022. Notably, however, analysts think that Mach7 Technologies will break even (at a free cash flow level) before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

Is Mach7 Technologies' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Mach7 Technologies actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Although it's hardly brilliant growth, it's good to see the company grew revenue by 11% in the last year. Clearly, however, the crucial factor is whether the company will grow its business going forward. 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 Mach7 Technologies To Raise More Cash For Growth?

While Mach7 Technologies is showing solid revenue growth, 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.

Mach7 Technologies' cash burn of AU$434k is about 0.3% of its AU$165m market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

How Risky Is Mach7 Technologies' Cash Burn Situation?

As you can probably tell by now, we're not too worried about Mach7 Technologies' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its weak point is its revenue growth, but even that wasn't too bad! It's clearly very positive to see that analysts are forecasting the company will break even fairly soon. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. While it's important to consider hard data like the metrics discussed above, many investors would also be interested to note that Mach7 Technologies insiders have been trading shares in the company. Click here to find out if they have been buying or selling.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.

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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.