We Think RattanIndia Infrastructure (NSE:RTNINFRA) Needs To Drive Business Growth Carefully

We can readily understand why investors are attracted to unprofitable companies. For example, RattanIndia Infrastructure (NSE:RTNINFRA) shareholders have done very well over the last year, with the share price soaring by 190%. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

Given its strong share price performance, we think it's worthwhile for RattanIndia Infrastructure shareholders to consider whether its cash burn is concerning. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

See our latest analysis for RattanIndia Infrastructure

Does RattanIndia Infrastructure Have A Long Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In September 2020, RattanIndia Infrastructure had ₹157m in cash, and was debt-free. In the last year, its cash burn was ₹170m. Therefore, from September 2020 it had roughly 11 months of cash runway. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Is RattanIndia Infrastructure's Cash Burn Changing Over Time?

RattanIndia Infrastructure didn't record any revenue over the last year, indicating that it's an early stage company still developing its business. Nonetheless, we can still examine its cash burn trajectory as part of our assessment of its cash burn situation. Remarkably, it actually increased its cash burn by 1,048% in the last year. With that kind of spending growth its cash runway will shorten quickly, as it simultaneously uses its cash while increasing the burn rate. Admittedly, we're a bit cautious of RattanIndia Infrastructure due to its lack of significant operating revenues. So we'd generally prefer stocks from this list of stocks that have analysts forecasting growth.

How Hard Would It Be For RattanIndia Infrastructure To Raise More Cash For Growth?

Since its cash burn is moving in the wrong direction, RattanIndia Infrastructure shareholders may wish to think ahead to when the company may need to raise more cash. Companies can raise capital through either debt or equity. 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.

Since it has a market capitalisation of ₹10b, RattanIndia Infrastructure's ₹170m in cash burn equates to about 1.7% of its market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.

So, Should We Worry About RattanIndia Infrastructure's Cash Burn?

On this analysis of RattanIndia Infrastructure's cash burn, we think its cash burn relative to its market cap was reassuring, while its increasing cash burn has us a bit worried. Even though we don't think it has a problem with its cash burn, the analysis we've done in this article does suggest that shareholders should give some careful thought to the potential cost of raising more money in the future. Taking an in-depth view of risks, we've identified 2 warning signs for RattanIndia Infrastructure that you should be aware of before investing.

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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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