Here's Why We're Not Too Worried About Razor Labs' (TLV:RZR) Cash Burn Situation

We can readily understand why investors are attracted to unprofitable companies. By way of example, Razor Labs ( TLV:RZR ) has seen its share price rise 182% over the last year, in large part due to a recent deal within the mining sector, delighting many shareholders. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

Given its strong share price performance, we think it's worthwhile for Razor Labs shareholders to consider whether its cash burn is concerning. 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). The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Razor Labs

When Might Razor Labs Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at June 2023, Razor Labs had cash of ₪39m and no debt. In the last year, its cash burn was ₪14m. That means it had a cash runway of about 2.7 years as of June 2023. Arguably, that's a prudent and sensible length of runway to have. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Razor Labs Growing?

Happily, Razor Labs is travelling in the right direction when it comes to its cash burn, which is down 60% over the last year. But it's hard to delight in that cash burn reduction given the 52% collapse in revenue. 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. This graph of historic earnings and revenue shows how Razor Labs is building its business over time.

How Hard Would It Be For Razor Labs To Raise More Cash For Growth?

Even though it seems like Razor Labs is developing its business nicely, we still like to consider how easily it could raise more money to accelerate growth. 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).

Razor Labs has a market capitalisation of ₪78m and burnt through ₪14m last year, which is 18% of the company's market value. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.

So, Should We Worry About Razor Labs' Cash Burn?

Even though its falling revenue makes us a little nervous, we are compelled to mention that we thought Razor Labs' cash runway was relatively promising. Cash burning companies are always on the riskier side of things, but after considering all of the factors discussed in this short piece, we're not too worried about its rate of cash burn. On another note, Razor Labs has 4 warning signs (and 2 which are potentially serious) we think you should know about.

If you would prefer to check out another company with better fundamentals, then do not miss this free list of interesting companies, that have HIGH return on equity and low debt or this list of stocks which are all forecast to grow .

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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.