Companies Like Mortech (GTSM:7419) Can Afford 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. Nonetheless, only a fool would ignore the risk that a loss making company burns through its cash too quickly.

So, the natural question for Mortech (GTSM:7419) shareholders is whether they should be concerned by its rate of 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. Let's start with an examination of the business' cash, relative to its cash burn.

See our latest analysis for Mortech

Does Mortech Have A Long Cash Runway?

A cash runway is defined as the length of time it would take a company to run out of money if it kept spending at its current rate of cash burn. In June 2020, Mortech had NT$353m in cash, and was debt-free. Importantly, its cash burn was NT$391k over the trailing twelve months. So it had a very long cash runway of many years from June 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 Well Is Mortech Growing?

Mortech managed to reduce its cash burn by 98% over the last twelve months, which is extremely promising, when it comes to considering its need for cash. And while hardly exciting, it was still good to see revenue growth of 13% during that time. It seems to be growing nicely. In reality, this article only makes a short study of the company's growth data. You can take a look at how Mortech has developed its business over time by checking this visualization of its revenue and earnings history.

How Easily Can Mortech Raise Cash?

We are certainly impressed with the progress Mortech has made over the last year, but it is also worth considering how costly it would be if it wanted to raise more cash to fund faster growth. Issuing new shares, or taking on debt, are the most common ways for a listed company to raise more money for its business. Many companies end up issuing new shares to fund future growth. We can compare a company's cash burn to its market capitalisation to get a sense for how many new shares a company would have to issue to fund one year's operations.

Mortech has a market capitalisation of NT$656m and burnt through NT$391k last year, which is 0.06% of the company's market value. So it could almost certainly just borrow a little to fund another year's growth, or else easily raise the cash by issuing a few shares.

So, Should We Worry About Mortech's Cash Burn?

It may already be apparent to you that we're relatively comfortable with the way Mortech is burning through its cash. For example, we think its cash burn reduction suggests that the company is on a good path. Its revenue growth wasn't quite as good, but was still rather encouraging! After considering a range of factors in this article, we're pretty relaxed about its cash burn, since the company seems to be in a good position to continue to fund its growth. Taking a deeper dive, we've spotted 3 warning signs for Mortech you should be aware of, and 1 of them is a bit unpleasant.

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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