We can readily understand why investors are attracted to unprofitable companies. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
Given this risk, we thought we'd take a look at whether Silex Systems (ASX:SLX) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Silex Systems Run Out Of Money?
A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Silex Systems last reported its balance sheet in June 2020, it had zero debt and cash worth AU$27m. Importantly, its cash burn was AU$7.1m over the trailing twelve months. So it had a cash runway of about 3.8 years from June 2020. A runway of this length affords the company the time and space it needs to develop the business. The image below shows how its cash balance has been changing over the last few years.
How Is Silex Systems' Cash Burn Changing Over Time?
In the last year, Silex Systems did book revenue of AU$1.6m, but its revenue from operations was less, at just AU$582k. 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. Cash burn was pretty flat over the last year, which suggests that management are holding spending steady while the business advances its strategy. Silex Systems 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 Silex Systems Raise Cash?
While its cash burn is only increasing slightly, Silex Systems shareholders should still consider the potential need for further cash, down the track. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future 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.
Silex Systems has a market capitalisation of AU$101m and burnt through AU$7.1m last year, which is 7.0% of the company's market value. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
How Risky Is Silex Systems' Cash Burn Situation?
As you can probably tell by now, we're not too worried about Silex Systems' cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. 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. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Silex Systems (1 makes us a bit uncomfortable!) that you should be aware of before investing here.
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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Silex Systems Limited, a technology commercialization company, engages in the research and development, commercialization, and license of SILEX laser uranium enrichment technology in Australia.
Flawless balance sheet with moderate growth potential.