Stock Analysis

We Think AnteoTech (ASX:ADO) Can Easily Afford To Drive Business Growth

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ASX:ADO
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We can readily understand why investors are attracted to unprofitable companies. By way of example, AnteoTech (ASX:ADO) has seen its share price rise 1,460% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

In light of its strong share price run, we think now is a good time to investigate how risky AnteoTech'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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

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How Long Is AnteoTech's Cash Runway?

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 2020, AnteoTech had cash of AU$6.4m and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through AU$1.2m. Therefore, from December 2020 it had 5.5 years of cash runway. 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. You can see how its cash balance has changed over time in the image below.

debt-equity-history-analysis
ASX:ADO Debt to Equity History April 28th 2021

How Is AnteoTech's Cash Burn Changing Over Time?

Although AnteoTech had revenue of AU$2.0m in the last twelve months, its operating revenue was only AU$755k in that time period. Given how low that operating leverage is, we think it's too early to put much weight on the revenue growth, so we'll focus on how the cash burn is changing, instead. Notably, its cash burn was actually down by 66% in the last year, which is a real positive in terms of resilience, but uninspiring when it comes to investment for growth. AnteoTech makes us a little nervous due to its lack of substantial operating revenue. We prefer most of the stocks on this list of stocks that analysts expect to grow.

How Easily Can AnteoTech Raise Cash?

There's no doubt AnteoTech's rapidly reducing cash burn brings comfort, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund further growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive 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).

AnteoTech has a market capitalisation of AU$778m and burnt through AU$1.2m last year, which is 0.2% of the company's 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 AnteoTech's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way AnteoTech is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. 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 AnteoTech 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 companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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