ManagePay Systems Berhad (KLSE:MPAY) Is In A Strong Position To Grow Its Business

There's no doubt that money can be made by owning shares of unprofitable businesses. By way of example, ManagePay Systems Berhad (KLSE:MPAY) has seen its share price rise 273% over the last year, delighting many shareholders. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given its strong share price performance, we think it's worthwhile for ManagePay Systems Berhad shareholders to consider whether its cash burn is concerning. 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

See our latest analysis for ManagePay Systems Berhad

How Long Is ManagePay Systems Berhad's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. ManagePay Systems Berhad has such a small amount of debt that we'll set it aside, and focus on the RM7.9m in cash it held at September 2020. Looking at the last year, the company burnt through RM624k. That means it had a cash runway of very many years as of September 2020. 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. The image below shows how its cash balance has been changing over the last few years.

How Well Is ManagePay Systems Berhad Growing?

Given our focus on ManagePay Systems Berhad's cash burn, we're delighted to see that it reduced its cash burn by a nifty 97%. And it could also show revenue growth of 19% in the same period. We think it is growing rather well, upon reflection. Of course, we've only taken a quick look at the stock's growth metrics, here. This graph of historic earnings and revenue shows how ManagePay Systems Berhad is building its business over time.

How Hard Would It Be For ManagePay Systems Berhad To Raise More Cash For Growth?

There's no doubt ManagePay Systems Berhad seems to be in a fairly good position, when it comes to managing its cash burn, but even if it's only hypothetical, it's always worth asking how easily it could raise more money to fund growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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.

ManagePay Systems Berhad has a market capitalisation of RM149m and burnt through RM624k last year, which is 0.4% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

Is ManagePay Systems Berhad's Cash Burn A Worry?

It may already be apparent to you that we're relatively comfortable with the way ManagePay Systems Berhad is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. And even though its revenue growth wasn't quite as impressive, it was still a positive. Looking at all the measures in this article, together, we're not worried about its rate of cash burn, which seems to be under control. Taking a deeper dive, we've spotted 5 warning signs for ManagePay Systems Berhad you should be aware of, and 1 of them is concerning.

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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