We can readily understand why investors are attracted to unprofitable companies. 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 OneSoft Solutions (CVE:OSS) 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.
How Long Is OneSoft Solutions' Cash Runway?
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 December 2021, OneSoft Solutions had CA$5.5m in cash, and was debt-free. Looking at the last year, the company burnt through CA$2.3m. So it had a cash runway of about 2.4 years from December 2021. Arguably, that's a prudent and sensible length of runway to have. The image below shows how its cash balance has been changing over the last few years.
How Well Is OneSoft Solutions Growing?
It was fairly positive to see that OneSoft Solutions reduced its cash burn by 38% during the last year. Revenue also improved during the period, increasing by 9.5%. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. In reality, this article only makes a short study of the company's growth data. You can take a look at how OneSoft Solutions has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can OneSoft Solutions Raise Cash?
There's no doubt OneSoft Solutions seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund 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. 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 CA$34m, OneSoft Solutions' CA$2.3m in cash burn equates to about 6.6% of its 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 OneSoft Solutions' Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way OneSoft Solutions 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. Its weak point is its revenue growth, but even that wasn't too bad! Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for OneSoft Solutions (1 doesn't sit too well with us!) that you should be aware of before investing here.
If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow.
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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.