Stock Analysis

We're Interested To See How Netccentric (ASX:NCL) Uses Its Cash Hoard To Grow

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ASX:NCL
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Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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.

So, the natural question for Netccentric (ASX:NCL) shareholders is whether they should be concerned by its rate of cash burn. 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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Does Netccentric Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. As at December 2021, Netccentric had cash of S$5.4m and no debt. Looking at the last year, the company burnt through S$201k. That means it had a cash runway of very many years as of December 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 April 30th 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 45% in the last twelve months. In reality, this article only makes a short study of the company's growth data. 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?

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. 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.

Since it has a market capitalisation of S$28m, Netccentric's S$201k in cash burn equates to about 0.7% of its market value. 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 Netccentric's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Netccentric's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. 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. An in-depth examination of risks revealed 2 warning signs for Netccentric that readers should think about before committing capital to this stock.

Of course Netccentric 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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