Is AAC Clyde Space (STO:AAC) In A Good Position To Invest In Growth?

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, biotech and mining exploration companies often lose money for years before finding success with a new treatment or mineral discovery. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should AAC Clyde Space (STO:AAC) 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. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.

Check out our latest analysis for AAC Clyde Space

How Long Is AAC Clyde Space's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. In March 2023, AAC Clyde Space had kr39m in cash, and was debt-free. Looking at the last year, the company burnt through kr57m. That means it had a cash runway of around 8 months as of March 2023. 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 AAC Clyde Space Growing?

Some investors might find it troubling that AAC Clyde Space is actually increasing its cash burn, which is up 37% in the last year. The silver lining is that revenue was up 27%, showing the business is growing at the top line. Considering the factors above, the company doesn’t fare badly when it comes to assessing how it is changing over time. 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.

Can AAC Clyde Space Raise More Cash Easily?

Given the trajectory of AAC Clyde Space's cash burn, many investors will already be thinking about how it might raise more cash in the future. Companies can raise capital through either debt or equity. 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.

AAC Clyde Space has a market capitalisation of kr221m and burnt through kr57m last year, which is 26% of the company's market value. That's fairly notable cash burn, so if the company had to sell shares to cover the cost of another year's operations, shareholders would suffer some costly dilution.

Is AAC Clyde Space's Cash Burn A Worry?

Even though its cash runway makes us a little nervous, we are compelled to mention that we thought AAC Clyde Space's revenue growth was relatively promising. Summing up, we think the AAC Clyde Space's cash burn is a risk, based on the factors we mentioned in this article. On another note, we conducted an in-depth investigation of the company, and identified 4 warning signs for AAC Clyde Space (2 can't be ignored!) that you should be aware of before investing here.

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.