We're Not Very Worried About Efficient E-Solutions Berhad's (KLSE:EFFICEN) Cash Burn Rate

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. But while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So should Efficient E-Solutions Berhad (KLSE:EFFICEN) shareholders be worried about its cash burn? 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 Efficient E-Solutions Berhad

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

A company's cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When Efficient E-Solutions Berhad last reported its balance sheet in March 2021, it had zero debt and cash worth RM50m. Looking at the last year, the company burnt through RM6.4m. Therefore, from March 2021 it had 7.9 years of cash runway. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. You can see how its cash balance has changed over time in the image below.

How Well Is Efficient E-Solutions Berhad Growing?

Efficient E-Solutions Berhad reduced its cash burn by 7.7% during the last year, which points to some degree of discipline. Revenue also improved during the period, increasing by 7.8%. On balance, we'd say the company is improving over time. Of course, we've only taken a quick look at the stock's growth metrics, here. You can take a look at how Efficient E-Solutions Berhad has developed its business over time by checking this visualization of its revenue and earnings history.

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. 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. 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 RM167m, Efficient E-Solutions Berhad's RM6.4m in cash burn equates to about 3.8% 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.

How Risky Is Efficient E-Solutions Berhad's Cash Burn Situation?

As you can probably tell by now, we're not too worried about Efficient E-Solutions Berhad's cash burn. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. Its weak point is its cash burn reduction, but even that wasn't too bad! 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.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of companies insiders are buying, and this list of stocks growth stocks (according to analyst forecasts)

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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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