Here's Why We're Watching Salutica Berhad's (KLSE:SALUTE) Cash Burn Situation

Just because a business does not make any money, does not mean that the stock will go down. For example, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

Given this risk, we thought we'd take a look at whether Salutica Berhad (KLSE:SALUTE) 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. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

View our latest analysis for Salutica Berhad

How Long Is Salutica Berhad's Cash Runway?

You can calculate a company's cash runway by dividing the amount of cash it has by the rate at which it is spending that cash. In March 2021, Salutica Berhad had RM32m in cash, and was debt-free. In the last year, its cash burn was RM33m. That means it had a cash runway of around 12 months as of March 2021. That's quite a short cash runway, indicating the company must either reduce its annual cash burn or replenish its cash. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Salutica Berhad Growing?

Notably, Salutica Berhad actually ramped up its cash burn very hard and fast in the last year, by 134%, signifying heavy investment in the business. On the bright side, at least operating revenue was up 34% over the same period, giving some cause for hope. 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. You can take a look at how Salutica Berhad is growing revenue over time by checking this visualization of past revenue growth.

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

Given the trajectory of Salutica Berhad's cash burn, many investors will already be thinking about how it might raise more cash in the future. 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. 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.

Salutica Berhad's cash burn of RM33m is about 15% of its RM219m 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.

So, Should We Worry About Salutica Berhad's Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Salutica Berhad's revenue growth was relatively promising. We don't think its cash burn is particularly problematic, but after considering the range of factors in this article, we do think shareholders should be monitoring how it changes over time. Taking a deeper dive, we've spotted 2 warning signs for Salutica Berhad you should be aware of, and 1 of them is concerning.

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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