We Think Balaji Telefilms (NSE:BALAJITELE) Can Afford To Drive Business Growth

We can readily understand why investors are attracted to unprofitable companies. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Balaji Telefilms (NSE:BALAJITELE) shareholders is whether they should be concerned by its rate of 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.

Check out our latest analysis for Balaji Telefilms

How Long Is Balaji Telefilms' Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2020, Balaji Telefilms had cash of ₹2.0b and such minimal debt that we can ignore it for the purposes of this analysis. Looking at the last year, the company burnt through ₹1.4b. So it had a cash runway of approximately 17 months from March 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 Balaji Telefilms Growing?

We reckon the fact that Balaji Telefilms managed to shrink its cash burn by 24% over the last year is rather encouraging. And considering that its operating revenue gained 34% during that period, that's great to see. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how Balaji Telefilms is building its business over time.

How Hard Would It Be For Balaji Telefilms To Raise More Cash For Growth?

Balaji Telefilms 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. Many companies end up issuing new shares to fund future 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).

Balaji Telefilms has a market capitalisation of ₹8.8b and burnt through ₹1.4b last year, which is 16% of the company's market value. As a result, we'd venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About Balaji Telefilms' Cash Burn?

The good news is that in our view Balaji Telefilms' cash burn situation gives shareholders real reason for optimism. Not only was its cash burn reduction quite good, but its revenue growth was a real positive. 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. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Balaji Telefilms (of which 1 doesn't sit too well with us!) 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)

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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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