Here's Why We're Not Too Worried About Efficient E-Solutions Berhad's (KLSE:EFFICEN) Cash Burn Situation

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 Efficient E-Solutions Berhad (KLSE:EFFICEN) 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. We'll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

Check out our latest analysis for Efficient E-Solutions Berhad

When Might Efficient E-Solutions Berhad Run Out Of Money?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Efficient E-Solutions Berhad last reported its balance sheet in September 2022, it had zero debt and cash worth RM44m. Looking at the last year, the company burnt through RM6.5m. So it had a cash runway of about 6.7 years from September 2022. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Efficient E-Solutions Berhad Growing?

Some investors might find it troubling that Efficient E-Solutions Berhad is actually increasing its cash burn, which is up 22% in the last year. Given that its operating revenue increased 181% in that time, it seems the company has reason to think its expenditure is working well to drive growth. If revenue is maintained once spending on growth decreases, that could well pay off! We think it is growing rather well, upon reflection. In reality, this article only makes a short study of the company's growth data. You can take a look at how Efficient E-Solutions Berhad is growing revenue over time by checking this visualization of past revenue growth.

How Easily Can Efficient E-Solutions Berhad Raise Cash?

We are certainly impressed with the progress Efficient E-Solutions Berhad has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Companies can raise capital through either debt or equity. Commonly, a business will sell new shares in itself to raise cash and drive growth. By comparing a company's annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of RM156m, Efficient E-Solutions Berhad's RM6.5m in cash burn equates to about 4.2% of its market value. 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 Efficient E-Solutions Berhad's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Efficient E-Solutions Berhad is burning through its cash. For example, we think its revenue growth suggests that the company is on a good path. While its increasing cash burn wasn't great, the other factors mentioned in this article more than make up for weakness on that measure. After taking into account the various metrics mentioned in this report, we're pretty comfortable with how the company is spending its cash, as it seems on track to meet its needs over the medium term. Its important for readers to be cognizant of the risks that can affect the company's operations, and we've picked out 3 warning signs for Efficient E-Solutions Berhad that investors should know when investing in the stock.

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.

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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.