Dropsuite (ASX:DSE) Is In A Strong Position To Grow Its Business

By
Simply Wall St
Published
December 07, 2021
ASX:DSE
Source: Shutterstock

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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Dropsuite (ASX:DSE) shareholders be worried about its cash burn? 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). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

View our latest analysis for Dropsuite

How Long Is Dropsuite's Cash Runway?

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 Dropsuite last reported its balance sheet in June 2021, it had zero debt and cash worth AU$2.4m. Importantly, its cash burn was AU$617k over the trailing twelve months. That means it had a cash runway of about 3.9 years as of June 2021. There's no doubt that this is a reassuringly long runway. The image below shows how its cash balance has been changing over the last few years.

debt-equity-history-analysis
ASX:DSE Debt to Equity History December 7th 2021

How Well Is Dropsuite Growing?

Happily, Dropsuite is travelling in the right direction when it comes to its cash burn, which is down 70% over the last year. This reduction was no doubt supported by its strong revenue growth of 58% in the same period. Considering these factors, we're fairly impressed by its growth trajectory. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Dropsuite is building its business over time.

Can Dropsuite Raise More Cash Easily?

We are certainly impressed with the progress Dropsuite has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Commonly, a business will sell new shares in itself to raise cash and drive growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.

Since it has a market capitalisation of AU$138m, Dropsuite's AU$617k in cash burn equates to about 0.4% of its 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.

How Risky Is Dropsuite's Cash Burn Situation?

It may already be apparent to you that we're relatively comfortable with the way Dropsuite is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. And even its cash burn reduction was very encouraging. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash. Readers need to have a sound understanding of business risks before investing in a stock, and we've spotted 3 warning signs for Dropsuite that potential shareholders should take into account before putting money into a stock.

Of course Dropsuite 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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