We're Keeping An Eye On dynaCERT's (TSE:DYA) 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 Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether dynaCERT (TSE:DYA) shareholders should be worried about its cash burn. 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for dynaCERT

When Might dynaCERT 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. dynaCERT has such a small amount of debt that we'll set it aside, and focus on the CA$16m in cash it held at March 2021. Looking at the last year, the company burnt through CA$13m. So it had a cash runway of approximately 14 months from March 2021. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. You can see how its cash balance has changed over time in the image below.

How Is dynaCERT's Cash Burn Changing Over Time?

Whilst it's great to see that dynaCERT has already begun generating revenue from operations, last year it only produced CA$205k, so we don't think it is generating significant revenue, at this point. Therefore, for the purposes of this analysis we'll focus on how the cash burn is tracking. With the cash burn rate up 48% in the last year, it seems that the company is ratcheting up investment in the business over time. However, the company's true cash runway will therefore be shorter than suggested above, if spending continues to increase. Admittedly, we're a bit cautious of dynaCERT due to its lack of significant operating revenues. We prefer most of the stocks on this list of stocks that analysts expect to grow.

Can dynaCERT Raise More Cash Easily?

Given its cash burn trajectory, dynaCERT shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.

dynaCERT has a market capitalisation of CA$162m and burnt through CA$13m last year, which is 8.3% 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.

Is dynaCERT's Cash Burn A Worry?

On this analysis of dynaCERT's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Separately, we looked at different risks affecting the company and spotted 4 warning signs for dynaCERT (of which 2 are potentially serious!) you should know about.

Of course dynaCERT 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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