Can Risanamento (BIT:RN) Afford To Invest In Growth?

Just because a business does not make any money, does not mean that the stock will go down. 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.

Given this risk, we thought we'd take a look at whether Risanamento (BIT:RN) shareholders should be worried about its 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. Let's start with an examination of the business' cash, relative to its cash burn.

How Long Is Risanamento's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. Risanamento has such a small amount of debt that we'll set it aside, and focus on the €22m in cash it held at September 2024. Looking at the last year, the company burnt through €27m. Therefore, from September 2024 it had roughly 10 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. The image below shows how its cash balance has been changing over the last few years.

Check out our latest analysis for Risanamento

Is Risanamento's Revenue Growing?

Given that Risanamento actually had positive free cash flow last year, before burning cash this year, we'll focus on its operating revenue to get a measure of the business trajectory. Sadly, operating revenue actually dropped like a stone in the last twelve months, falling 98%, which is rather concerning. In reality, this article only makes a short study of the company's growth data. You can take a look at how Risanamento has developed its business over time by checking this visualization of its revenue and earnings history.

Can Risanamento Raise More Cash Easily?

Since its revenue growth is moving in the wrong direction, Risanamento shareholders may wish to think ahead to when the company may need to raise more cash. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. Many companies end up issuing new shares to fund future 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.

Risanamento has a market capitalisation of €47m and burnt through €27m last year, which is 59% of the company's market value. That's high expenditure relative to the value of the entire company, so if it does have to issue shares to fund more growth, that could end up really hurting shareholders returns (through significant dilution).

How Risky Is Risanamento's Cash Burn Situation?

As you can probably tell by now, we're rather concerned about Risanamento's cash burn. Take, for example, its falling revenue, which suggests the company may have difficulty funding itself, in the future. And although we accept its cash runway wasn't as worrying as its falling revenue, it was still a real negative; as indeed were all the factors we considered in this article. Once we consider the metrics mentioned in this article together, we're left with very little confidence in the company's ability to manage its cash burn, and we think it will probably need more money. On another note, we conducted an in-depth investigation of the company, and identified 3 warning signs for Risanamento (1 is potentially serious!) that you should be aware of before investing here.

Of course Risanamento may not be the best stock to buy. So you may wish to see this free collection of companies boasting high return on equity, or this list of stocks with high insider ownership.

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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.