We Think Pointerra (ASX:3DP) Can Easily Afford To Drive Business Growth

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. Indeed, Pointerra (ASX:3DP) stock is up 2,415% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Pointerra shareholders to consider whether its cash burn is concerning. In this article, we define cash burn as its annual (negative) free cash flow, which is the amount of money a company spends each year to fund its growth. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Pointerra

How Long Is Pointerra'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. When Pointerra last reported its balance sheet in December 2020, it had zero debt and cash worth AU$4.5m. In the last year, its cash burn was AU$919k. Therefore, from December 2020 it had 4.9 years of cash runway. Notably, however, the one analyst we see covering the stock thinks that Pointerra will break even (at a free cash flow level) before then. If that happens, then the length of its cash runway, today, would become a moot point. The image below shows how its cash balance has been changing over the last few years.

How Is Pointerra's Cash Burn Changing Over Time?

In our view, Pointerra doesn't yet produce significant amounts of operating revenue, since it reported just AU$2.3m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Even though it doesn't get us excited, the 43% reduction in cash burn year on year does suggest the company can continue operating for quite some 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.

Can Pointerra Raise More Cash Easily?

While Pointerra is showing a solid reduction in its cash burn, it's still worth considering how easily it could raise more cash, even just to fuel faster 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. 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.

Pointerra's cash burn of AU$919k is about 0.2% of its AU$543m market capitalisation. 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.

Is Pointerra's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about Pointerra's cash burn. For example, we think its cash runway suggests that the company is on a good path. And even its cash burn reduction was very encouraging. It's clearly very positive to see that at least one analyst is forecasting the company will break even fairly soon. 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. Taking an in-depth view of risks, we've identified 3 warning signs for Pointerra that you should be aware of before investing.

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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This article by Simply Wall St is general in nature. 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.
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