Even when a business is losing money, it's possible for shareholders to make money if they buy a good business at the right price. 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. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.
So, the natural question for Suvidhaa Infoserve (NSE:SUVIDHAA) shareholders is whether they should be concerned by its rate of 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
Does Suvidhaa Infoserve Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. As at March 2021, Suvidhaa Infoserve had cash of ₹193m and no debt. In the last year, its cash burn was ₹64m. That means it had a cash runway of about 3.0 years as of March 2021. There's no doubt that this is a reassuringly long runway. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Suvidhaa Infoserve Growing?
At first glance it's a bit worrying to see that Suvidhaa Infoserve actually boosted its cash burn by 48%, year on year. The fact that operating revenue was down 72% only gives us further disquiet. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. In reality, this article only makes a short study of the company's growth data. You can take a look at how Suvidhaa Infoserve has developed its business over time by checking this visualization of its revenue and earnings history.
How Easily Can Suvidhaa Infoserve Raise Cash?
Even though it seems like Suvidhaa Infoserve 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. 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.
Suvidhaa Infoserve's cash burn of ₹64m is about 1.5% of its ₹4.2b market capitalisation. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.
Is Suvidhaa Infoserve's Cash Burn A Worry?
On this analysis of Suvidhaa Infoserve's cash burn, we think its cash runway was reassuring, while its falling revenue has us a bit worried. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Suvidhaa Infoserve (1 is significant!) that you should be aware of before investing here.
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.
When trading Suvidhaa Infoserve or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.