Companies Like Reward Wool Industry (TPE:1423) Are In A Position To Invest In Growth

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 the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.

So should Reward Wool Industry (TPE:1423) shareholders be worried about its cash burn? For the purposes of this article, cash burn is the annual rate at which an unprofitable company spends cash to fund its growth; its negative free cash flow. The first step is to compare its cash burn with its cash reserves, to give us its 'cash runway'.

Check out our latest analysis for Reward Wool Industry

How Long Is Reward Wool Industry's Cash Runway?

A company's cash runway is calculated by dividing its cash hoard by its cash burn. When Reward Wool Industry last reported its balance sheet in September 2020, it had zero debt and cash worth NT$466m. Looking at the last year, the company burnt through NT$125m. Therefore, from September 2020 it had 3.7 years of cash runway. A runway of this length affords the company the time and space it needs to develop the business. Depicted below, you can see how its cash holdings have changed over time.

How Well Is Reward Wool Industry Growing?

It was quite stunning to see that Reward Wool Industry increased its cash burn by 340% over the last year. And that is all the more of a concern in light of the fact that operating revenue was actually down by 62% in the last year, as the company no doubt scrambles to change its fortunes. In light of the above-mentioned, we're pretty wary of the trajectory the company seems to be on. 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 Reward Wool Industry is building its business over time.

How Easily Can Reward Wool Industry Raise Cash?

Even though it seems like Reward Wool Industry is developing its business nicely, we still like to consider how easily it could raise more money to accelerate 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).

Reward Wool Industry's cash burn of NT$125m is about 5.6% of its NT$2.2b market capitalisation. Given that is a rather small percentage, it would probably be really easy for the company to fund another year's growth by issuing some new shares to investors, or even by taking out a loan.

Is Reward Wool Industry's Cash Burn A Worry?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought Reward Wool Industry's cash runway was relatively promising. 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 Reward Wool Industry's situation. Separately, we looked at different risks affecting the company and spotted 2 warning signs for Reward Wool Industry (of which 1 is concerning!) 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. 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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