Stock Analysis

Companies Like Netccentric (ASX:NCL) Can Afford To Invest In Growth

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ASX:NCL
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We can readily understand why investors are attracted to unprofitable companies. Indeed, Netccentric (ASX:NCL) stock is up 129% in the last year, providing strong gains for shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky Netccentric's cash burn is. For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. Let's start with an examination of the business' cash, relative to its cash burn.

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How Long Is Netccentric's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2021, Netccentric had cash of S$5.4m and no debt. Importantly, its cash burn was S$54k over the trailing twelve months. That means it had a cash runway of very many years as of June 2021. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:NCL Debt to Equity History January 15th 2022

Is Netccentric's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because Netccentric actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. We think that it's fairly positive to see that revenue grew 39% in the last twelve months. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Netccentric is growing revenue over time by checking this visualization of past revenue growth.

Can Netccentric Raise More Cash Easily?

Notwithstanding Netccentric's revenue growth, it is still important to consider how it could raise more money, if it needs to. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Netccentric's cash burn of S$54k is about 0.1% of its S$44m 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.

Is Netccentric's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way Netccentric 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 revenue growth was also very reassuring. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. An in-depth examination of risks revealed 3 warning signs for Netccentric that readers should think about before committing capital to this stock.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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