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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Nordtelekom Távközlési Szolgáltató Nyrt (BUSE:NORDTELEKOM) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.
When Might Nordtelekom Távközlési Szolgáltató Nyrt Run Out Of Money?
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 June 2019, Nordtelekom Távközlési Szolgáltató Nyrt had cash of Ft21m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was Ft228m over the trailing twelve months. That means it had a cash runway of under two months as of June 2019. It's extremely surprising to us that the company has allowed its cash runway to get that short! Depicted below, you can see how its cash holdings have changed over time.
How Easily Can Nordtelekom Távközlési Szolgáltató Nyrt Raise Cash?
Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash to drive 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.
Nordtelekom Távközlési Szolgáltató Nyrt has a market capitalisation of Ft3.0b and burnt through Ft228m last year, which is 7.5% of the company's market value. 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.
So, Should We Worry About Nordtelekom Távközlési Szolgáltató Nyrt's Cash Burn?
Given it's an early stage company, we don't have a lot of data with which to judge Nordtelekom Távközlési Szolgáltató Nyrt's cash burn. Having said that, we can say that its cash burn relative to its market cap was a real positive. Therefore, in our view, the company has somewhat problematic cash burn rates, and it may face the need for more funding in the future. We think it's very important to consider the cash burn for loss making companies, but other considerations such as the amount the CEO is paid can also enhance your understanding of the business. You can click here to see what Nordtelekom Távközlési Szolgáltató Nyrt's CEO gets paid each year.
Of course Nordtelekom Távközlési Szolgáltató Nyrt 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.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Simply Wall St has no position in the stocks mentioned.
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