Stock Analysis

We Think Netccentric (ASX:NCL) Can Easily Afford To Drive Business Growth

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ASX:NCL
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Just because a business does not make any money, does not mean that the stock will go down. 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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Netccentric (ASX:NCL) 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 Netccentric

When Might Netccentric Run Out Of Money?

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. In the last year, its cash burn was S$54k. 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.

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ASX:NCL Debt to Equity History September 24th 2021

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. It's nice to see that operating revenue was up 39% in the last year. In reality, this article only makes a short study of the company's growth data. This graph of historic revenue growth shows how Netccentric is building its business over time.

Can Netccentric Raise More Cash Easily?

While Netccentric 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. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

Netccentric has a market capitalisation of S$42m and burnt through S$54k last year, which is 0.1% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Netccentric's Cash Burn?

As you can probably tell by now, we're not too worried about Netccentric's cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its revenue growth was very encouraging. 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. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 2 warning signs for Netccentric that potential shareholders should take into account before putting money into a stock.

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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