Here's Why We're Watching Pacific Edge's (NZSE:PEB) Cash Burn Situation

There's no doubt that money can be made by owning shares of unprofitable businesses. 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 while history lauds those rare successes, those that fail are often forgotten; who remembers Pets.com?

So, the natural question for Pacific Edge (NZSE:PEB) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we'll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for Pacific Edge

Does Pacific Edge Have A Long 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. As at September 2023, Pacific Edge had cash of NZ$62m and no debt. In the last year, its cash burn was NZ$29m. That means it had a cash runway of about 2.1 years as of September 2023. That's decent, giving the company a couple years to develop its business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Pacific Edge Growing?

At first glance it's a bit worrying to see that Pacific Edge actually boosted its cash burn by 19%, year on year. Having said that, it's revenue is up a very solid 62% in the last year, so there's plenty of reason to believe in the growth story. Of course, with spend going up shareholders will want to see fast growth continue. It seems to be growing nicely. Clearly, however, the crucial factor is whether the company will grow its business going forward. For that reason, it makes a lot of sense to take a look at our analyst forecasts for the company.

How Hard Would It Be For Pacific Edge To Raise More Cash For Growth?

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. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. 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).

Pacific Edge has a market capitalisation of NZ$70m and burnt through NZ$29m last year, which is 42% of the company's market value. From this perspective, it seems that the company spent a huge amount relative to its market value, and we'd be very wary of a painful capital raising.

Is Pacific Edge's Cash Burn A Worry?

On this analysis of Pacific Edge's cash burn, we think its revenue growth was reassuring, while its cash burn relative to its market cap has us a bit worried. While we're the kind of investors who are always a bit concerned about the risks involved with cash burning companies, the metrics we have discussed in this article leave us relatively comfortable about Pacific Edge's situation. Taking a deeper dive, we've spotted 3 warning signs for Pacific Edge you should be aware of, and 1 of them is a bit unpleasant.

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.