There's no doubt that money can be made by owning shares of unprofitable businesses. 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.
So, the natural question for XL Holdings Berhad (KLSE:XL) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.
Does XL Holdings Berhad Have A Long Cash Runway?
A company's cash runway is calculated by dividing its cash hoard by its cash burn. XL Holdings Berhad has such a small amount of debt that we'll set it aside, and focus on the RM12m in cash it held at October 2021. Importantly, its cash burn was RM16m over the trailing twelve months. Therefore, from October 2021 it had roughly 9 months of cash runway. To be frank, this kind of short runway puts us on edge, as it indicates the company must reduce its cash burn significantly, or else raise cash imminently. Depicted below, you can see how its cash holdings have changed over time.
How Well Is XL Holdings Berhad Growing?
It was quite stunning to see that XL Holdings Berhad increased its cash burn by 430% over the last year. It seems likely that the vociferous operating revenue growth of 136% during that time may well have given management confidence to ramp investment. Considering both these factors, we're not particularly excited by its growth profile. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic revenue growth shows how XL Holdings Berhad is building its business over time.
How Hard Would It Be For XL Holdings Berhad To Raise More Cash For Growth?
Given the trajectory of XL Holdings Berhad's cash burn, many investors will already be thinking about how it might raise more cash in the future. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Commonly, a business will sell new shares in itself to raise cash and drive 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.
XL Holdings Berhad's cash burn of RM16m is about 15% of its RM107m market capitalisation. Given that situation, it's fair to say the company wouldn't have much trouble raising more cash for growth, but shareholders would be somewhat diluted.
Is XL Holdings Berhad's Cash Burn A Worry?
On this analysis of XL Holdings Berhad's cash burn, we think its revenue growth was reassuring, while its increasing cash burn has us a bit worried. Looking at the factors mentioned in this short report, we do think that its cash burn is a bit risky, and it does make us slightly nervous about the stock. Taking a deeper dive, we've spotted 3 warning signs for XL Holdings Berhad you should be aware of, and 2 of them make us uncomfortable.
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.
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.