We're Keeping An Eye On Agfa-Gevaert's (EBR:AGFB) Cash Burn Rate

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. 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 Agfa-Gevaert (EBR:AGFB) 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). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Agfa-Gevaert

When Might Agfa-Gevaert Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2024, Agfa-Gevaert had €57m in cash, and was debt-free. Importantly, its cash burn was €51m over the trailing twelve months. That means it had a cash runway of around 13 months as of September 2024. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Agfa-Gevaert Growing?

It was fairly positive to see that Agfa-Gevaert reduced its cash burn by 50% during the last year. Unfortunately, however, operating revenue declined by 40% during the period. Considering both these factors, we're not particularly excited by its growth profile. 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 Hard Would It Be For Agfa-Gevaert To Raise More Cash For Growth?

While Agfa-Gevaert seems to be in a fairly good position, 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. 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.

Since it has a market capitalisation of €120m, Agfa-Gevaert's €51m in cash burn equates to about 42% of its market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

How Risky Is Agfa-Gevaert's Cash Burn Situation?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Agfa-Gevaert's cash burn reduction was relatively promising. Summing up, we think the Agfa-Gevaert's cash burn is a risk, based on the factors we mentioned in this article. An in-depth examination of risks revealed 1 warning sign for Agfa-Gevaert that readers should think about before committing capital to this stock.

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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.