We Think essensys (LON:ESYS) Can Easily Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. By way of example, essensys (LON:ESYS) has seen its share price rise 120% over the last year, delighting many shareholders. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

In light of its strong share price run, we think now is a good time to investigate how risky essensys' cash burn is. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

View our latest analysis for essensys

How Long Is essensys' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In July 2021, essensys had UK£37m in cash, and was debt-free. In the last year, its cash burn was UK£1.4m. So it had a very long cash runway of many years from July 2021. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

Is essensys' Revenue Growing?

We're hesitant to extrapolate on the recent trend to assess its cash burn, because essensys 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 2.3%. 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.

Can essensys Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, essensys shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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).

essensys' cash burn of UK£1.4m is about 0.7% of its UK£191m market capitalisation. 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 essensys' Cash Burn?

As you can probably tell by now, we're not too worried about essensys' 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. Taking all the factors in this report into account, we're not at all worried about its cash burn, as the business appears well capitalized to spend as needs be. On another note, essensys has 4 warning signs (and 1 which is concerning) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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.

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