Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
Given this risk, we thought we'd take a look at whether Senetas (ASX:SEN) shareholders should 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). Let's start with an examination of the business' cash, relative to its cash burn.
When Might Senetas Run Out Of Money?
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. In June 2020, Senetas had AU$16m in cash, and was debt-free. Looking at the last year, the company burnt through AU$349k. That means it had a cash runway of very many years as of June 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. Depicted below, you can see how its cash holdings have changed over time.
Is Senetas' Revenue Growing?
Given that Senetas actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Although it's hardly brilliant growth, it's good to see the company grew revenue by 6.1% in the last year. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how Senetas is building its business over time.
How Easily Can Senetas Raise Cash?
While Senetas is showing solid revenue growth, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.
Senetas' cash burn of AU$349k is about 0.5% of its AU$73m 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 Senetas' Cash Burn Situation?
It may already be apparent to you that we're relatively comfortable with the way Senetas 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. On this analysis its revenue growth was its weakest feature, but we are not concerned about it. After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Senetas (1 is concerning!) that you should be aware of before investing here.
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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