Companies Like Silex Systems (ASX:SLX) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. For example, Silex Systems (ASX:SLX) shareholders have done very well over the last year, with the share price soaring by 245%. 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 Silex Systems' cash burn is too risky. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for Silex Systems

How Long Is Silex Systems' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Silex Systems last reported its balance sheet in December 2022, it had zero debt and cash worth AU$40m. In the last year, its cash burn was AU$2.0m. So it had a very long cash runway of many years from December 2022. 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.

How Well Is Silex Systems Growing?

Silex Systems actually ramped up its cash burn by a whopping 82% in the last year, which shows it is boosting investment in the business. On the bright side, at least operating revenue was up 40% over the same period, giving some cause for hope. On balance, we'd say the company is improving over time. Clearly, however, the crucial factor is whether the company will grow its business going forward. So you might want to take a peek at how much the company is expected to grow in the next few years.

How Easily Can Silex Systems Raise Cash?

While Silex Systems seems to be in a decent position, we reckon it is still worth thinking about how easily it could raise more cash, if that proved desirable. 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).

Silex Systems has a market capitalisation of AU$811m and burnt through AU$2.0m last year, which is 0.2% 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 Silex Systems' Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Silex Systems 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. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Notably, our data indicates that Silex Systems insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course Silex Systems 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.