We're Keeping An Eye On Electreon Wireless' (TLV:ELWS) Cash Burn Rate

There's no doubt that money can be made by owning shares of unprofitable businesses. 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. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

Given this risk, we thought we'd take a look at whether Electreon Wireless (TLV:ELWS) 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'. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

See our latest analysis for Electreon Wireless

How Long Is Electreon Wireless' 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 September 2022, Electreon Wireless had ₪85m in cash, and was debt-free. In the last year, its cash burn was ₪83m. That means it had a cash runway of around 12 months as of September 2022. While that cash runway isn't too concerning, sensible holders would be peering into the distance, and considering what happens if the company runs out of cash. Depicted below, you can see how its cash holdings have changed over time.

How Is Electreon Wireless' Cash Burn Changing Over Time?

In our view, Electreon Wireless doesn't yet produce significant amounts of operating revenue, since it reported just ₪5.0m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. Over the last year its cash burn actually increased by a very significant 72%. While this spending increase is no doubt intended to drive growth, if the trend continues the company's cash runway will shrink very quickly. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Electreon Wireless has developed its business over time by checking this visualization of its revenue and earnings history.

How Hard Would It Be For Electreon Wireless To Raise More Cash For Growth?

Given its cash burn trajectory, Electreon Wireless shareholders may wish to consider how easily it could raise more cash, despite its solid cash runway. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

Electreon Wireless' cash burn of ₪83m is about 23% of its ₪364m market capitalisation. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

So, Should We Worry About Electreon Wireless' Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Electreon Wireless' cash runway was relatively promising. Summing up, we think the Electreon Wireless' cash burn is a risk, based on the factors we mentioned in this article. On another note, Electreon Wireless has 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.

Of course Electreon Wireless 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.