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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So should Meyer Burger Technology (VTX:MBTN) shareholders 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. Let's start with an examination of the business' cash, relative to its cash burn.
Does Meyer Burger Technology Have A Long Cash Runway?
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. As at December 2020, Meyer Burger Technology had cash of CHF140m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was CHF56m over the trailing twelve months. So it had a cash runway of about 2.5 years from December 2020. Importantly, analysts think that Meyer Burger Technology will reach cashflow breakeven in 4 years. That means unless the company reduces its cash burn quickly, it may well look to raise more cash. You can see how its cash balance has changed over time in the image below.
How Well Is Meyer Burger Technology Growing?
We reckon the fact that Meyer Burger Technology managed to shrink its cash burn by 38% over the last year is rather encouraging. In contrast, however, operating revenue tanked 65% during the period. Taken together, we think these growth metrics are a little worrying. While the past is always worth studying, it is the future that matters most of all. 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 Meyer Burger Technology To Raise More Cash For Growth?
Meyer Burger Technology 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. 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 comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).
Since it has a market capitalisation of CHF1.1b, Meyer Burger Technology's CHF56m in cash burn equates to about 5.3% 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.
How Risky Is Meyer Burger Technology's Cash Burn Situation?
Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Meyer Burger Technology's cash runway was relatively promising. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. 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. Taking an in-depth view of risks, we've identified 1 warning sign for Meyer Burger Technology that you should be aware of before investing.
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