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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?
So should Motor & General Finance (NSE:MOTOGENFIN) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.
When Might Motor & General Finance Run Out Of Money?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. Motor & General Finance has such a small amount of debt that we'll set it aside, and focus on the ₹3.3m in cash it held at March 2019. Looking at the last year, the company burnt through ₹38m. Therefore, from March 2019 it seems to us it had less than two months of cash runway. It's extremely surprising to us that the company has allowed its cash runway to get that short! You can see how its cash balance has changed over time in the image below.
Is Motor & General Finance's Revenue Growing?
We're hesitant to extrapolate on the recent trend to assess its cash burn, because Motor & General Finance actually had positive free cash flow last year, so operating revenue growth is probably our best bet to measure, right now. Regrettably, the company's operating revenue moved in the wrong direction over the last twelve months, declining by 29%. In reality, this article only makes a short study of the company's growth data. This graph of historic earnings and revenue shows how Motor & General Finance is building its business over time.
Can Motor & General Finance Raise More Cash Easily?
Since its revenue growth is moving in the wrong direction, Motor & General Finance shareholders may wish to think ahead to when the company may need to raise more cash. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. By looking at a company's cash burn relative to its market capitalisation, we gain insight on how much shareholders would be diluted if the company needed to raise enough cash to cover another year's cash burn.
Motor & General Finance's cash burn of ₹38m is about 5.5% of its ₹689m market capitalisation. That's a low proportion, so we figure the company would be able to raise more cash to fund growth, with a little dilution, or even to simply borrow some money.
So, Should We Worry About Motor & General Finance's Cash Burn?
Even though its cash runway makes us a little nervous, we are compelled to mention that we thought Motor & General Finance's cash burn relative to its market cap was relatively promising. Considering all the measures mentioned in this report, we reckon that its cash burn is fairly risky, and if we held shares we'd be watching like a hawk for any deterioration. 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 Motor & General Finance's CEO gets paid each year.
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