We can readily understand why investors are attracted to unprofitable companies. For example, although software-as-a-service business Salesforce.com lost money for years while it grew recurring revenue, if you held shares since 2005, you'd have done very well indeed. But the harsh reality is that very many loss making companies burn through all their cash and go bankrupt.
Given this risk, we thought we'd take a look at whether G&E Herbal Biotechnology (GTSM:4911) shareholders should be worried about its cash burn. In this report, we will consider the company's annual negative free cash flow, henceforth referring to it as the 'cash burn'. First, we'll determine its cash runway by comparing its cash burn with its cash reserves.
How Long Is G&E Herbal Biotechnology'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. In December 2020, G&E Herbal Biotechnology had NT$120m in cash, and was debt-free. In the last year, its cash burn was NT$6.0m. So it had a very long cash runway of many years from December 2020. While this is only one measure of its cash burn situation, it certainly gives us the impression that holders have nothing to worry about. The image below shows how its cash balance has been changing over the last few years.
How Is G&E Herbal Biotechnology's Cash Burn Changing Over Time?
In our view, G&E Herbal Biotechnology doesn't yet produce significant amounts of operating revenue, since it reported just NT$28m in the last twelve months. As a result, we think it's a bit early to focus on the revenue growth, so we'll limit ourselves to looking at how the cash burn is changing over time. The 77% reduction in its cash burn over the last twelve months may be good for protecting the balance sheet but it hardly points to imminent growth. In reality, this article only makes a short study of the company's growth data. You can take a look at how G&E Herbal Biotechnology is growing revenue over time by checking this visualization of past revenue growth.
Can G&E Herbal Biotechnology Raise More Cash Easily?
While we're comforted by the recent reduction evident from our analysis of G&E Herbal Biotechnology's cash burn, it is still worth considering how easily the company could raise more funds, if it wanted to accelerate spending to drive growth. Companies can raise capital through either debt or equity. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash and fund 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.
G&E Herbal Biotechnology's cash burn of NT$6.0m is about 0.4% of its NT$1.7b market capitalisation. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
Is G&E Herbal Biotechnology's Cash Burn A Worry?
It may already be apparent to you that we're relatively comfortable with the way G&E Herbal Biotechnology is burning through its cash. In particular, we think its cash runway stands out as evidence that the company is well on top of its spending. And even its cash burn reduction was very encouraging. 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. Separately, we looked at different risks affecting the company and spotted 3 warning signs for G&E Herbal Biotechnology (of which 1 makes us a bit uncomfortable!) you should know about.
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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