Luka Rijeka d.d (ZGSE:LKRI) Is In A Good Position To Deliver On Growth Plans

We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given this risk, we thought we'd take a look at whether Luka Rijeka d.d (ZGSE:LKRI) shareholders should 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'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for Luka Rijeka d.d

When Might Luka Rijeka d.d Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Luka Rijeka d.d has such a small amount of debt that we'll set it aside, and focus on the Kn43m in cash it held at September 2020. Importantly, its cash burn was Kn27m over the trailing twelve months. So it had a cash runway of approximately 19 months from September 2020. That's not too bad, but it's fair to say the end of the cash runway is in sight, unless cash burn reduces drastically. The image below shows how its cash balance has been changing over the last few years.

How Well Is Luka Rijeka d.d Growing?

On balance, we think it's mildly positive that Luka Rijeka d.d trimmed its cash burn by 15% over the last twelve months. Unfortunately, however, operating revenue declined by 11% during the period. Considering both these factors, we're not particularly excited by its growth profile. In reality, this article only makes a short study of the company's growth data. You can take a look at how Luka Rijeka d.d has developed its business over time by checking this visualization of its revenue and earnings history.

Can Luka Rijeka d.d Raise More Cash Easily?

Luka Rijeka d.d 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. 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. 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.

Luka Rijeka d.d's cash burn of Kn27m is about 5.7% of its Kn477m market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Luka Rijeka d.d's Cash Burn A Worry?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Luka Rijeka d.d's cash burn relative to its market cap was relatively promising. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Luka Rijeka d.d's situation. Taking a deeper dive, we've spotted 3 warning signs for Luka Rijeka d.d you should be aware of, and 2 of them don't sit too well with us.

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. 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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