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, Megawin Technology (GTSM:3122) shareholders have done very well over the last year, with the share price soaring by 143%. But while the successes are well known, investors should not ignore the very many unprofitable companies that simply burn through all their cash and collapse.
Given its strong share price performance, we think it's worthwhile for Megawin Technology shareholders to consider whether its cash burn is concerning. 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'.
How Long Is Megawin Technology's 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. As at December 2020, Megawin Technology had cash of NT$157m and such minimal debt that we can ignore it for the purposes of this analysis. Importantly, its cash burn was NT$27m over the trailing twelve months. So it had a cash runway of about 5.9 years from December 2020. Even though this is but one measure of the company's cash burn, the thought of such a long cash runway warms our bellies in a comforting way. Depicted below, you can see how its cash holdings have changed over time.
How Well Is Megawin Technology Growing?
It was quite stunning to see that Megawin Technology increased its cash burn by 303% over the last year. On the bright side, at least operating revenue was up 22% over the same period, giving some cause for hope. Considering both these metrics, we're a little concerned about how the company is developing. In reality, this article only makes a short study of the company's growth data. You can take a look at how Megawin Technology has developed its business over time by checking this visualization of its revenue and earnings history.
Can Megawin Technology Raise More Cash Easily?
While Megawin Technology seems to be in a fairly good position, it's still worth considering how easily it could raise more cash, even just to fuel faster growth. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. 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).
Megawin Technology has a market capitalisation of NT$892m and burnt through NT$27m last year, which is 3.0% of the company's market value. That means it could easily issue a few shares to fund more growth, and might well be in a position to borrow cheaply.
So, Should We Worry About Megawin Technology's Cash Burn?
It may already be apparent to you that we're relatively comfortable with the way Megawin Technology is burning through its cash. For example, we think its cash runway suggests that the company is on a good path. Although we do find its increasing cash burn to be a bit of a negative, once we consider the other metrics mentioned in this article together, the overall picture is one we are comfortable with. Based on the factors mentioned in this article, we think its cash burn situation warrants some attention from shareholders, but we don't think they should be worried. On another note, Megawin Technology has 4 warning signs (and 1 which is a bit unpleasant) we think 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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