Companies Like Pacific Edge (NZSE:PEB) Are In A Position To Invest In Growth

We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Pacific Edge (NZSE:PEB) shareholders 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. 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 Pacific Edge

How Long Is Pacific Edge's Cash Runway?

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. As at March 2022, Pacific Edge had cash of NZ$105m and no debt. Looking at the last year, the company burnt through NZ$19m. So it had a cash runway of about 5.6 years from March 2022. Importantly, though, analysts think that Pacific Edge will reach cashflow breakeven before then. In that case, it may never reach the end of its cash runway. The image below shows how its cash balance has been changing over the last few years.

How Well Is Pacific Edge Growing?

Some investors might find it troubling that Pacific Edge is actually increasing its cash burn, which is up 34% in the last year. The good news is that operating revenue increased by 49% in the last year, indicating that the business is gaining some traction. We think it is growing rather well, upon reflection. While the past is always worth studying, it is the future that matters most of all. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

Can Pacific Edge Raise More Cash Easily?

There's no doubt Pacific Edge 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. 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 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.

Pacific Edge has a market capitalisation of NZ$397m and burnt through NZ$19m last year, which is 4.7% of the company's 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 Pacific Edge's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Pacific Edge is burning through its cash. For example, we think its cash runway 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. Shareholders can take heart from the fact that analysts are forecasting it will reach breakeven. Looking at all the measures in this article, together, we're not worried about its rate of cash burn; the company seems well on top of its medium-term spending needs. On another note, Pacific Edge has 3 warning signs (and 1 which is potentially serious) we think you should know about.

Of course, you might find a fantastic investment by looking elsewhere. So take a peek at this free list of interesting companies, 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. 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.