EcoSynthetix (TSE:ECO) Is In A Good Position To Deliver On Growth Plans

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.

So should EcoSynthetix (TSE:ECO) shareholders be worried about its cash burn? In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. Let's start with an examination of the business' cash, relative to its cash burn.

Check out our latest analysis for EcoSynthetix

When Might EcoSynthetix Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2023, EcoSynthetix had cash of US$36m and no debt. In the last year, its cash burn was US$3.5m. That means it had a cash runway of very many years as of March 2023. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. You can see how its cash balance has changed over time in the image below.

How Well Is EcoSynthetix Growing?

EcoSynthetix actually ramped up its cash burn by a whopping 83% in the last year, which shows it is boosting investment in the business. As if that's not bad enough, the operating revenue also dropped by 4.6%, making us very wary indeed. Taken together, we think these growth metrics are a little worrying. 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 EcoSynthetix is building its business over time.

How Easily Can EcoSynthetix Raise Cash?

EcoSynthetix seems to be in a fairly good position, in terms of cash burn, but we still think it's worthwhile considering how easily it could raise more money if it wanted to. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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.

Since it has a market capitalisation of US$131m, EcoSynthetix's US$3.5m in cash burn equates to about 2.7% 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.

So, Should We Worry About EcoSynthetix's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way EcoSynthetix 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. While we must concede that its increasing cash burn is a bit worrying, the other factors mentioned in this article provide great comfort when it comes to the cash burn. Considering all the factors discussed in this article, we're not overly concerned about the company's cash burn, although we do think shareholders should keep an eye on how it develops. When you don't have traditional metrics like earnings per share and free cash flow to value a company, many are extra motivated to consider qualitative factors such as whether insiders are buying or selling shares. Please Note: EcoSynthetix insiders have been trading shares, according to our data. Click here to check whether insiders have been buying or selling.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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. 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.