There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, AnteoTech (ASX:ADO) stock is up 270% 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.
So notwithstanding the buoyant share price, we think it's well worth asking whether AnteoTech'scash burn is too risky 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
Does AnteoTech 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 June 2020, AnteoTech had cash of AU$3.2m and such minimal debt that we can ignore it for the purposes of this analysis. In the last year, its cash burn was AU$2.8m. Therefore, from June 2020 it had roughly 14 months of cash runway. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. You can see how its cash balance has changed over time in the image below.
How Is AnteoTech's Cash Burn Changing Over Time?
Although AnteoTech had revenue of AU$1.3m in the last twelve months, its operating revenue was only AU$299k in that time period. We don't think that's enough operating revenue for us to understand too much from revenue growth rates, since the company is growing off a low base. So we'll focus on the cash burn, today. With the cash burn rate up 14% in the last year, it seems that the company is ratcheting up investment in the business over time. That's not necessarily a bad thing, but investors should be mindful of the fact that will shorten the cash runway. AnteoTech makes us a little nervous due to its lack of substantial operating revenue. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.
How Easily Can AnteoTech Raise Cash?
Given its cash burn trajectory, AnteoTech shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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's cash burn of AU$2.8m is about 1.4% of its AU$196m 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 AnteoTech's Cash Burn Situation?
Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought AnteoTech's cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about AnteoTech's situation. On another note, AnteoTech has 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.
Of course AnteoTech 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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AnteoTech Limited, a surface chemistry company, develops, commercializes, manufactures, and distributes products for the life sciences, diagnostics, energy, and medical device markets primarily in Australia.
Adequate balance sheet and overvalued.