Here's Why We're Not At All Concerned With EcoSynthetix's (TSE:ECO) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. Indeed, EcoSynthetix (TSE:ECO) stock is up 140% in the last year, providing strong gains for shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for EcoSynthetix shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for EcoSynthetix

Does EcoSynthetix Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When EcoSynthetix last reported its balance sheet in December 2020, it had zero debt and cash worth US$42m. In the last year, its cash burn was US$21k. That means it had a cash runway of very many years as of December 2020. 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. The image below shows how its cash balance has been changing over the last few years.

Is EcoSynthetix's Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because EcoSynthetix actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 26%. 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?

Given its problematic fall in revenue, EcoSynthetix shareholders should consider how the company could fund its growth, if it turns out it needs more cash. 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. 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.

EcoSynthetix has a market capitalisation of US$207m and burnt through US$21k last year, which is 0.01% of the company's 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.

Is EcoSynthetix's Cash Burn A Worry?

As you can probably tell by now, we're not too worried about EcoSynthetix's cash burn. For example, we think its cash runway suggests that the company is on a good path. Although its falling revenue does give us reason for pause, the other metrics we discussed in this article form a positive picture overall. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Notably, our data indicates that EcoSynthetix insiders have been trading the shares. You can discover if they are buyers or sellers by clicking on this link.

Of course EcoSynthetix 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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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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